Memorandum by Mr Klaus Regling, Director
General of the Directorate-General for Economic and Financial
Affairs, European Commission
1. It has been suggested to us that
if the ECB adopted a symmetrical inflation target this would help
its communication strategy, as it would serve to align the ECB
rhetoric with the policy that it pursues. Would the Commission
welcome such a move?
The Eurosystem had to design its monetary policy
under very difficult circumstances with only a small amount of
euro area data available and with a lot of uncertainty about how
the introduction of the single currency would affect the behaviour
of euro area citizens. In this set-up the Eurosystem has defined
price stability as "HICP inflation rates of less than
2 per cent over the medium term". This definition explicitly
takes on board a lower bound as declines are not covered and an
upper bound as rates of 2 per cent and above are not covered either.
As I said before the Treasury Committee on 6 February 2003, this
does not constitute a symmetric inflation target, but it provides
the public with clear indications about the bounds of the definition
of price stability.
The review of the strategy in the first half
of 2003, which included an in-depth analysis of the definition
of price stability, has not provided evidence that there is a
need to change the definition as such. However, the ECB has clarified
the Eurosystem's definition by saying that it aims at HICP inflation
rates of "close to 2 per cent from below" over
the medium term. This can be seen as a narrowing of the range
of inflation rates the ECB is aiming at. Therefore the guidance
the ECB provides to the public has been improved and the narrow
range of HICP inflation rates below 2 per cent can serve as a
focal area for the formation of inflation expectations, which
have been around 1Ø per cent for quite some time.
All in all, the Eurosystem's monetary policy
has been successful in the past and it is therefore reasonable
that the serious assessment and evaluation of the strategy has
not resulted in changes of the definition of price stability.
In particular, the ECB has succeeded in guiding inflation expectations
and the clarification of 8 May 2003 should reinforce those expectations.
The Commission has welcomed the review and its results as a valuable
contribution to the ongoing process of improving the macroeconomic
policy framework of the euro area.
2. Should the period over which the
ECB is committed to meeting its inflation target be made more
The Eurosystem's monetary policy strategy is
fairly clear about the time horizon by comprising a definition
of price stability that refers to developments in the HICP "over
the medium term".
Some factors affect the HICP inflation rate
in the short run without necessarily providing reasons for responses
by monetary authorities; examples include adverse weather conditions,
changes in administered prices, oil price hikes or animal diseases.
These are the cases which I already described before the Committee
on 6 February 2003, where inflation exceeded the upper bound of
the definition of price stability in the short run. As regards
these short-term outliers of the HICP inflation rate, ie what
I called "temporary overshooting", it would not
make sense to have a very precise short-term horizon over which
a central bank should be committed to achieve its primary objective.
As a long-run horizon would also not be acceptable for various
reasons, it is the medium term that should matter for achieving
The fact that the concept of the medium term
does not come along with a specific number of months or years
should not be seen as a disadvantage. I share the view of the
new Governor of the Bank of England, Mervyn King, who once argued
that `central banks with inflation targetsand in that respect
a central bank with a price stability mandate can be regarded
as similarin the end will be held accountable in such a
way as to make the time horizon irrelevant.
If this is true for inflation targeting central banks, it seems
to be the right approach for the ECB as well.
3. What would be the effect of the recent
decision of the European Council to amend the voting modalities
of the Governing Council?
The Governing Council is composed of the governors
of the national central banks of the Member States having adopted
the euro, as well as the 6 members of the Executive Board. Each
member of the Governing Council has a single voting right (18
voting members in total at the present moment). Under unchanged
rules, each enlargement of the euro area would give rise to an
increase in the total number of voting rights in the Governing
With regard to the voting modalities of the
Governing Council, the 3-group rotation model introduces a ceiling
on the total number of voting rights. This ceiling corresponds
to a total of 21 votes (6 + 15), possibly increasing to 24 votes
(6 + 18) during a transitional period. The adoption of such a
ceiling effectively reduces the total number of voting rights,
compared to the status quo, which will be exercised within the
Governing Council in a future enlarged Union. The reformed voting
modalities help to ensure that the Governing Council will continue
to take decisions in an efficient manner and it therefore constitutes
an important step in the adjustment of ECB decision making in
the context of enlargement. The allocation of governors to three
groups will be based on a specific indicator based on two components:
the share of the aggregate gross domestic product at market prices
of the Member States without a derogation and the share in the
total aggregated balance sheet of the monetary financial institutions
of the Member States without a derogation.
The rotation model will not lead to any immediate
change. Its full and entire effects will only be felt as from
the date on which the number of members of the Governing Council
exceeds 21, ie not before 2007 at the earliest. Moreover, if the
Governing Council decides so, the effective start of the rotation
model could be further deferred until the number of governors
4. Looking beyond the mandate given
to the ECB to amend Article 10.2 of the ESCB Protocol, what in
the Commission's opinion would be the optimal solution to the
problems posed to the workings of the Governing Council by enlargement?
As foreseen in the relevant legal basis (Art.
10.6 ECB), the Commission was invited to issue an opinion on the
ECB's Recommendation. Proposing an "optimal" solution
as regards the workings of the Governing Council evidently requires
a prior comprehensive review and assessment of the ECB's governance.
This did not form part of the Commission's role and assignment
in the context of the reform of the voting modalities of the Governing
Council and was moreover excluded by timing constraints.
However, the Commission felt that it was appropriate
to draw attention to the fact that the content and limitations
of the "enabling clause" (Article 10.6 of the ESCB/ECB
Statute) prevented the consideration of more comprehensive changes
to the ECB's decision-making in the area of monetary policy, and/or
on the role of the Executive Board.
The Commission's Opinion moreover sets out the
different conditions which should be fulfilled in order to implement
a successful and effective governance model. These conditions
are fourfold and relate to the efficiency of decision-making,
the fact that the interest of the whole euro area need to be kept
in mind by the decision-makers, the neutrality of the system vis-a"-vis
existing and future Member States and the need for the voting
and decision-making system to be comprehensible to markets and
5. Is there a conflict between national
interests and European interests? If so, how might these be reduced?
Article 108 of the EC Treaty is supposed to guarantee the independence
of the ECB and protect the members of the Executive Board and
the Governing Council from such pressures. Does the Commission
consider that this Article needs redrafting; and if so, how?
As far as the ECB's Governing Council is concerned,
its members should make decisions with the interests of the entire
euro area in mind. The modification of the voting modalities as
described in Article 10.2 of the Statute of the ESCB/ECB does
not affect this essential principle.
Article 108 EC aims at preserving the independence
of the ECB, the national central banks and the members of the
decision-making bodies of these institutions. The Commission is
not aware of any particular difficulties in this respect which
would justify or require an amendment to Article 108 EC, and therefore
has no amendments to propose.
6. Should there be an independent "monetary
policy board"? How should such a board operate? Who would
take the final decision on the level of interest rates?
An answer to this question presupposes that
the Commission would have carried out a full and comprehensive
assessment on ECB governance, and notably on the working of the
ECB's Governing Council and the Executive Board in particular.
For the reasons explained above (see reply to question nr 4) this
was not the case. The Commission is therefore not in a position
to propose a final answer to the different questions put forward.
As already pointed out, the legal framework for the revision of
the ECB's governance, as established by the enabling clause forming
part of the Nice Treaty, moreover did not allow more comprehensive
changes to be envisaged.
In the framework of a wider mandate, going beyond
amending Art. 10.2 ESCB/ECB, it would certainly be appropriate
to examine in greater detail the relative merits of other central
bank governance models, such as those based on a monetary policy
board, notably because this approach has been successfully operated
by many central banks, including some EU central banks, and therefore
deserves to be closely examined in the context of a possible future
reform of the ECB's governance.
7. The Opinion suggests that the Executive
Board be "possibly enlarged". What should be the relative
size of the Executive Board in relation to the Governing Council?
In the Commission's opinion, a possible enlargement
of the Executive Board is only relevant in case this body would
be transformed into a monetary policy board. The extension of
the responsibilities of the Executive Board, together with the
wider geographical scope of the euro area in the medium term,
could justify the enlargement of the membership of the Executive
8. The Opinion says that it would be
"appropriate to modify the current rules for appointment
of the Executive Board". What should be the roles of the
Commission, the European Council, the European Parliament and
national parliaments in appointing the President and the other
Members of the Executive Board?
The Commission believes that it would be appropriate
to appoint the different members of the Executive Board by qualified
majority rather than by common accord (ie unanimity) as is currently
the case. This proposition is particularly relevant in the context
of an enlarged Union composed of 25 Member States and eventually
even more. This view has received support from many Member States
and the Commission therefore hopes that this change could be agreed
in the forthcoming IGC.
Apart from this change to the voting rules,
the Commission does not consider that the role of the different
institutions involved in the appointment process of the members
of the Executive Board should be modified.
9. Does the Commission have any other
proposals for changing the structure and governance of the ECB?
In the framework of the activities of the Convention
on the future of Europe, the Commission has submitted several
contributions, in particular COM(2002)247 final and COM(2002)728
final. In both cases, the Commission did not consider that any
other elements, apart from those already raised in its Opinion
of 19 February 2003 (COM(2003)81 final), relating to the ECB,
were in need of reform.
10. Should the ECB continue to set its
own inflation target? Is there an alternative that the Commission
The inflation record of the EU Member States
varied a lot in the 1970s and early 1980s. While some Member States
performed rather poorly, displaying not only double digit rates
but rates of more than 20 per cent, others performed relatively
well. But even later in the 1980s and 1990s the performance of
central banks differed a lot. As price stability had been decided
to be the primary goal of the Economic and Monetary Union, it
was reasonable to look closely to those central banks that had
performed well. These central banks had never worked with a specific
inflation target imposed on them from the outside world (the same
can be said about the Fed in the U.S. though it does not have
a primary goal).
In order to make use of the better parts of
the European monetary heritage it was decided to keep the tradition
of letting the central bank determine its operational value. The
experience of the euro area in the first years confirms the advantages
of such a set-up.
The Commission is aware of an ongoing debate
about the way in which targets are set. Some, including the Economic
and Monetary Affairs Committee of the European Parliament and
several academics have argued that more control is needed and
that democracy would imply that the Parliament gets some influence.
In the UK, on the other hand, the government has responsibility
for the operational value, while in Sweden the Riksbank sets the
value on its own. Another issue would be the frequency of decisions
and the risk to move to a more discretionary monetary policy,
which would be exactly the opposite of what has been targeted
by provisions making the ECB an independent central bank. Even
without repeating the discussion of rules versus discretion, it
should be obvious that each proposal for a modification has some
All in all, I think that the system of checks
and balances between the ECB and other European institutions has
worked effectively. From that point of view I do not regard changes
6 June 2003
5 See Mervyn King, Challenges for monetary policy:
new and old, in: New challenges for monetary policy, Federal
Reserve Bank of Kansas City, 1999, pp 11-57. Back