Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 40-60)



  40. Going on from your point, you have mentioned the fact that one of the models which you prefer is to see a smaller group or groups of particular countries. My question really is to what extent there may be some scope for the smaller group determining interest rate policy rather than the entire group?
  (Professor Goodhart) I think the question is that this needs to be looked at within the legal constitutional context and the make-up of the governing council. I think in terms of simple decision-making procedures it would be highly desirable to have a much smaller group making policy, and for the board members at the centre to out-number the national central banks, however grouped together, at the periphery.
  (Professor Buiter) Charles says 11, which I think is definitely in the right ballpark. Six executive board members and five selected using criteria, not necessarily national central bank governors, although that probably would be the case in the short run. The constituency system he proposes does indeed make sense. Although one problem with it is if too many countries that were alike in economic circumstances were to club together, the tendency to start speaking for the club rather than for the euro area as a whole could be reinforced, and that is an awkwardness which is going to be part and parcel of the set-up as long as the national input is at all significant. Even less than 11 might be good. I thought nine at the Bank of England was alright, although I preferred it actually when there were just seven of us. To get the optimal discussion, I think the return to additional numbers diminishes very, very rapidly.

Lord Lea of Crondall

  41. Just on a point about the nature of statistics, to begin with. It is the case, is it not, that the euro ex hypothesi has only got one rate at which the euro deflates. There is a certain sense in which we have to think of the euro zone as having one deflation rate, which is indeed part of the reality. My question is going back to Lord Lamont's reference to something he read in the Financial Times, which I also read, which was an argument not about asymmetries or asymmetric shocks, but was an argument about monetary policy being generally too tight. They raised the interesting question not so much about the two pillars, and whether they were correctly interpreting the inflation question or the money supply question, but almost a third pillar, as I would see it, of whether economic growth per se ought to be part of the remit of the ECB. It is hard to criticise the ECB, is it not, if not carrying out part of the remit which is not there. If we do want economic growth to be balanced more with the inflation question, is there not a question of thinking, now the euro is well and off the ground, that in the next treaty changes there could be some balancing like the Fed, of economic growth actually being part of the remit of the ECB?
  (Professor Buiter) I would oppose that quite strongly. I think the Fed is lucky that its three-legged mandate has basically been forgotten in practice; the Fed basically follows an inflation target, which it achieves by responding to movements about potential and other indicators. I do not think real growth should be a target of monetary policy. Having an explicitly symmetric inflation target, I think, meets most of the substance of the desire of those who want the central bank to pay more attention to real economic activity. To go beyond that I think creates a danger of illusions being reinforced about what monetary policy can deliver. Monetary policy cannot increase the long-term growth of the economy and has no lasting effect on the equilibrium rate of employment. It has important effects at cyclical frequencies but that is it. The best way to formulate policy is to have a single nominal objective, preferably, in the case of the euro area, a symmetric inflation objective, but definitely not a growth objective on top of that. It is idle talk; it is like making church attendance an objective of monetary policy; there is no way of influencing it significantly in the long-run.
  (Professor Goodhart) While I agree entirely with everything Willem has said, I think I would just add that the ECB has actually in practice run a rather careful and successful tightrope, because almost all the public argument has been that they have been too tight, and growth in the euro zone has been too slow. If you look at what has been achieved on the inflation side, they have allowed the inflation rate continuously to be marginally over their upper limit. Inflation in the euro zone has not been running at or below two per cent, it has running marginally above two per cent. They have actually nicely managed the balance between political pressure for maintaining growth and maintaining expansion in the euro zone, and what they themselves set out to do. There has been a lot of criticism of the ECB, but in practical terms what they have actually done, in my view, they have done really extremely well, with one minor qualification which is that they have frequently been a month or two slow, because of the need to build, as they see it, consensus rather than take majority decisions.
  (Professor Buiter) I agree with that.

Lord Sheldon

  42. Professor Goodhart in his paper says that monetary unification in advance of political unification is what might be called "a brave policy". I understand that. What it means is that we need to deal with this particular problem. When we look at national governments we see the relationship between the central banks and the government is sometimes very close, reasonably close and certainly not distant. In the European Central Bank we do not have that kind of relationship. Should not something be forged between the European Central Bank and some other body, one could suggest all sorts of ones for that, in order to at least have the overall economic policy aspect of it directed into the central banks so at least they are aware of it? Should something not be done on those lines?
  (Professor Buiter) The European Commission has the right to have a non-voting member attending the ECB Council meetings, and the Council itself has the right.
  (Professor Goodhart) Yes, the Council of Ministers.
  (Professor Buiter) There is the same kind of coordination at that level that we have in the UK, with a Treasury representative attending, on a non-voting but speaking basis, the MPC meetings. What we do not have is the equivalent of lunches between Eddie George and Gordon Brown, because Mr Duisenberg would be lunching all day with 12 finance ministers. There is again a numbers problem with coordination. There is no euro-wide budgetary authority with whom to coordinate and that is the problem, but it is something we have to live with.
  (Professor Goodhart) I think the question goes rather wider. The difference between the Monetary Policy Committee and the ECB is that the objective the Monetary Policy Committee is asked to follow is given by the Chancellor of the Exchequer, so there is no goal independence whatsoever. In the ECB's case, under the Treaty, apart from requiring the ECB to follow price stability, the ECB is completely in command of the definition of what is meant by price stability, the time horizon over which it should achieve it and so on. It is answerable to the European Parliament, but it can decide its own parameters. Those parameters cannot be adjusted by a political body. My own preference is for the British model, in which there is no goal independence, in which the Central Bank Monetary Policy Committee has its objective set for it. I think that that is a much better procedure in dealing with what is known as a "democratic deficit". However, the present set-up is enshrined in the Maastricht Treaty, and undoubtedly reflected the way the Bundesbank saw itself, and it is improbable whether the Bundesbank and the Germans would have agreed to the Treaty except under the conditions which we now have. Whether it is capable of being adjusted at some future stage is a much wider political issue. My guess is, no, because any Treaty amendment would require unanimity, and there would be some who would not agree to any adjustment. I think we are stuck with it, with a central bank which has got a degree of goal independence to a considerable degree greater than that in this country.

  43. My second question comes from Professor Buiter's paper where he says that the ECB should be charged explicitly with responsibility for systemic financial stability in euro land. This is something along the line that was being suggested. Can you explain how you see that developing?
  (Professor Buiter) This is the other unavoidable task and responsibility of the central bank. The first one is to maintain price stability, and the second one is to be the guarantor of the integrity of the financial system, especially the banking sector, but also any financial market of significant import for the economy as a whole in which liquidity problems could possibly arise. They have to be there as the lenders of last resort, ready and willing to create liquidity instantly in any amount required to preserve the integrity of the financial system. That role is not inconsistent with the Treaty; it has simply not been fleshed out fully and it is an evolving arrangement. It is clear that most of the stability role of the euro system is played by the national central banks still in the ESCB, not by the Frankfurt ECB itself. That in some ways is logical. It is still true that the banking system is a system where the main European banks have national identities. Of course, you have American banks operating as well. It is also a system in which it is important, if financial crises go beyond mere liquidity crises and involve systemic solvency issues, that the agency with the short-term deep pockets, the national central bank, be backed by the agency with the long-term deep pockets, the only one that can pay for the long-term recapitalisation of stricken financial institutions, that is the treasuries, the ministries of finance and taxpayers. Here comes the problem—because the ECB has no fiscal authority standing behind it with long-term deep pockets. They can provide short-term liquidity to any extent they want. They can distribute it through national central banks or drop it as aid packages over the entire euro area. That is not the issue. The long-term ability to recapitalise a sizeable chunk of the European banking system is not at the moment there in Frankfurt, and that is a problem. I think it would be helpful if there were clear understanding about what would happen when they do get serious banks with European charters? Who stands behind them? It has to be the ECB. They can do it, but the mandate is not clear. I think ambiguity in this area is not constructive. I believe ambiguity is never constructive in monetary policy and I would like to see this clarified.

Lord Taverne

  44. I want to come back to Lord Lea's question earlier. Professor Buiter says very convincingly that monetary policy could have no long-term beneficial effect on the rate of growth; and, again, Professor Goodhart says basically the evidence supports it and that so far the central bank has not actually been unduly rigid in its approach to its inflation target. Is it not true, while it may not be possible for monetary policy to have any long-term beneficial effect, it could have a reverse and very adverse effect; and at this particular time most of the voices say that the Bank is being unduly conservative? The Financial Times, for example, has taken the rather extreme view that it should have cut interest rates by one per cent on the last occasion. At the present time, do you think they are not being unduly conservative? Secondly, they have changed their targets, in the sense that they are now almost mentioning the two per cent as the official target? Is it not the whole purpose of transparency that you should not create confusion; and has not the last announcement of the Bank really not created more confusion than light?
  (Professor Buiter) I agree with Charles' statement on this. I think the European Central Bank has for the last four years done an effective job. I also agree that they have been systematically slightly behind the curve, but only at the most a couple of months or so, because they have this consensus mechanism for decision-making, rather than the majority decision-making which permits the Bank of England to react more swiftly. It is certainly possible for monetary policy to be damaging and harmful. The central bank is, at best, neutral but can also do damage. This has not happened. The fact that inflation has been above target in the euro area for years now is not consistent with the view that monetary policy has been too tight. The problem we have here is that in the euro area many governments, especially the larger countries, have mismanaged their budgetary policies during the years of high growth and cyclical recovery, and they now find themselves constrained by the Growth and Stability Pact. It is true that the Growth and Stability Pact does not make a lot of sense, but it did not make a lot of sense four or five years ago when these governments could anticipate running into that constraint. There are ways of managing even the Growth and Stability Pact and these ways have not been adopted by the national authorities. The amount of fiscal elbow room consistent with the Pact is zero or negative now in most of the large European countries. I do not think that the rather depressed economic performance of the large continental European countries can be laid at the door of the European Central Bank. There are national domestic factors that account for the bulk of it.

  45. What about the question of confusion at the present time?
  (Professor Buiter) On balance they have reduced the amount of confusion by making it clear that really M3 is being phased out, that M3 is going to be a monetary indicator, and the pillar has become a post now, and will become a little post no doubt later on. Close to two per cent but below it is probably slightly clearer than somewhere between zero and two. On balance, I think clarity has been enhanced, although it could have been enhanced more, I agree with that.
  (Professor Goodhart) I think there is a fair way to go in trying to get real clarity and transparency. I do not know what the central point for the target is. I do not know whether there is a lower bound. I do not know, if there are bounds, whether they are symmetric. I agree that there has been a shift from a pillar to a post. I do not really know what the components of the post are, and what weights are going to be given to the different monetary aggregates, and whether indeed the first pillar really still exists, in anything other than a pillar can exist as a fig leaf—without mixing metaphors too far!

  Chairman: I think metaphors are beginning to run away with themselves!

Lord Armstrong of Ilminster

  46. There is a whole new meaning to the phrase "from pillar to post"! Would you like to see the Executive Board of the central bank given formal authority to take interest rate decisions without having to formally involve the Governing Council?
  (Professor Buiter) No, I think there should be non full-time executive members on the decision-making rate-setting council. It should be a smaller number, and ideally it should be selected on a different basis than from the national central bank governors. You do not want the Executive Board of the ECB to take the decision on their own. I do not think that is a good idea.
  (Professor Goodhart) It is, after all, the European System of Central Banks which includes the national central banks as partners. Also the experience of the rate change immediately after 11 September shows that even with the present set-up, if necessary, they can move rapidly.

  47. Would you like the inflation target, if we may use that language, to be given to the ECB by ECOFIN or by the euro group to produce a nearer approximation of the sort of system that prevails in this country?
  (Professor Goodhart) My answer to that would be, yes. I do not think that the politicians would choose to set an inappropriate and excessive target for inflation. I think it would be desirable if the goals of the ECB and the political body in Europe were aligned more closely.
  (Professor Buiter) I would favour that too. Of course, it is not consistent with the Treaty at the moment. I would prefer the ministers of finance of the euro area to set the council target separately, but most likely with a qualified majority or with unanimity. In that way I differ from Charles. I would not quite want the British system. The British system puts the power to change the target in the hands of one man or one woman, the Chancellor and, in principle, he could change it every day before and after lunch. That has not happened but the framework carries that risk. I would want a system that has greater safeguards than the current British one, which only has self-control as the safeguard to refrain the body politick from changing the target arbitrarily and too frequently.

Lord Hannay of Chiswick

  48. Would either of you consider there were any circumstances in which it was in the interests of the European Union to have an exchange rate policy—for example, if the euro shows serious signs of overshooting in an upper direction, or the dollar overshooting in a downward direction? If so, how would you see that being articulated between the euro zone ministers and the Bank? Secondly, your prescriptions for the post-enlargement decision-making processes in the European Central Bank strike me as having two practical defects: firstly, they are highly integrationist and they involve going quite a lot further down the road to a single European economy; and, secondly, presumably if you follow the IMF pattern you will exacerbate the problem between large and small Member States, because almost by definition the leading representatives in each constituency will be the larger Member State with a cluster of smaller Member States around it. Therefore you will have even more of a problem than the rest of the European Union is having in struggling with its decision-making processes for the future.
  (Professor Buiter) The only time there is a need for an exchange rate target is when the euro zone contemplates monetary union with the United States of America. That is clearly a case where the exchange rate has to be managed. I think an inflation target with the exchange rate as an outcome is the only viable one. You certainly would not want two nominal targets to be part of what a central bank shoots for, because you end up shooting yourself in the foot most likely and chasing a real exchange rate target with monetary policy—something we have seen too often. My first best system for monetary decision-making would probably be more integrationist than the constituency system, which is to have people appointed on the basis of expertise without regard to nationality—outside members and Executive Board members. The constituency system is a system for keeping the national legacy, the euro system legacy, on board which I think for practical reasons is probably unavoidable in the foreseeable future. It is true that constituencies often tend to be dominated by the largest country in that—but under the proposals of the ECB itself it is not going to be all that different. There are going to be 21 votes, six for the Executive Board and 15 for the national members, with four out of the 15 guaranteed for the five largest countries and then another eight for the next group, and three for a fairly large group of small countries. So size matters in monetary policy. I do not think it is undemocratic, if you are going to have a nationally weighted system, for Germany to have a larger voice in the Council of the ECB than Malta.
  (Professor Goodhart) On an exchange rate target it takes two to tango, and that means if there is a fixed exchange rate between the US and the euro (and that is the only one that is really relevant) then there is a question of who follows whom. There is no question in my mind that the Fed would insist on maintaining its complete independence in deciding interest rates and monetary conditions. That would mean, if you wanted an exchange rate target, the ECB would have to follow, effectively pretty slavishly, exactly what the Americans were doing. I do not see the euro zone, when faced with that possibility, wanting to go down that road at all. On the big states/small states issue that is endemic in virtually every aspect of European politics you can think of. It is not just within monetary policy, it occurs everywhere. I think of the Convention and I think of the issue about having the European President. Finally, are we being too integrationist? I think the main problem, or fault-line in a way, with the euro zone on the monetary side is that you have a federal overall monetary policy and then you have national fiscal policies; and there are difficulties in that. If you like, a logical procedure would either be to move to a more integrationist system in which more federal competency, more fiscal competencies got given to the federal centre to accompany the single federal monetary policy, or you have to say that maybe the present system does not work very well and you go back in the other direction.

Lord Jones

  49. The subject is necessarily perhaps complicated and technical, but does the Bank collectively consider its reputation in the Member States that make the Bank elected? How can the Bank's status be enhanced? Does it consider that it needs to broadcast its intentions and achievements to the peoples of the various States? How can its image be enhanced? How can its acceptance be enhanced? Do we not have a problem here in the midst of Europe?
  (Professor Buiter) I think that the best way to enhance the reputation for the ECB is to do a competent job. It would help if the accountability and transparency of the institution and its operating procedures were enhanced and whilst I think that they are moving towards more comprehensible operating targets for monetary policies, there is still some way to go. I would like it to get symmetric inflation targets, I would like to see a clear explanation of the horizon over which it is to be achieved and I would like to have the transparency of the policy objective matched by the transparency of the decision-making process. That would not just involve members of the Executive Board turning up and talking to the relevant Members of the European Parliament, but it would involve minutes which would reflect in a serious way the range of issues under consideration. I think the consensus model is not a good way for building up trust when you know that behind the scenes there really is disagreement in the consensus. I would hope that a more open approach to policy and making it clear that there are disagreements about the modality of policy would help to make the institution become more alive for the electorate. You have to remember that for most people monetary policy in any country is an esoteric business which takes place at a high level surrounded by clouds of smoke, so I do not think the European Central Bank is unique in not being on everyone's level as a favoured institution.

Lord Marlesford

  50. My question is whether an assessment of the performance of the ECB in its first four years of life is frankly particularly useful as an assessment of how it may perform in the next four years for the very simple reason that we are in a very different economic situation worldwide? In its first four years there was a powerful locomotive in the United States' economy and in its original remit it was performing quite well. Given this, I think, in a way, I go back to Lord Sheldon's original question which is that there is a lack of ability to manage the euro-land economy, monetary policy has been shown to have considerable limitations when you are in a serious situation, particularly in Japan, and even to some extent in the United States, we do have a Stability Pact which is basically administered on a pretty old premise, an out-of-date premise dating from Maastricht by the Commission through ECOFIN, and we do lack anyone really who has either the power or the responsibility, let alone the accountability, for managing the economy of euro-land in the situation we are in at the moment.
  (Professor Goodhart) A very heavy weight undoubtedly rests on the shoulders of the members of the Governing Council of the ECB. If the US is going through a period of slower growth and Japan remains relatively stagnant, we need the euro zone to be able to take up quite a lot of the work around the world and certainly to avoid allowing the euro zone to fall into deflation. I happen to think that the members of the ECB, and I know quite a lot of the members of the Board, are of remarkably high quality, a high-calibre lot; and I think they have done a good job in the past and I have faith in them that they will be prepared to take the measures which will keep the euro zone and hence, through that, the world economy ticking along in a situation where there are a lot of dangers. I think that they are good people and I think that they understand monetary policy issues well. As I think we have made quite clear, there are elements in the constitution of the ECB, particularly relating to transparency and accountability, that neither Willem nor I are entirely keen about and some of the presentational elements, I think, are less than perfectly clear, but in terms of being able to do the work that they were established to do, I have every faith that they will do so.
  (Professor Buiter) I would agree with that. The next four years will be certainly very different from the last four years. We have had the `New Economy' and outside Japan a huge financial asset boom and then a collapse. I think what this points to is that monetary policy was not made very competently outside Europe; in fact it may have been made more competently in Europe than outside it. I will not comment on Japan's monetary policy performance which ever since the collapse of the late 1980s has been very hard to rationalise—I think it is a tragedy. I also think that US monetary policy towards the end of the boom clearly fed an unsustainable bubble rather than trying to dampen it. In the UK the limits of monetary policy were made clear to everybody by the fact that quarter after quarter and year after year, the MPC reflected on the excessive strength of sterling and the unbalanced economy and could not do anything about it, so it is important to realise that monetary policy is strictly limited as to what it can achieve. It can dampen, but not eliminate normal business cycle fluctuations, it can prevent runaway inflation and it can set a floor under economic activity and prevent disasters from happening. Japan's predicament is not necessary. It is an example of large, self-inflicted wounds. I am totally confident that our European Central Bankers are well aware of all this and that they will not deliver the kind of performance that would land us in the kind of bog Japan has been in for the last ten years.

Lord Geddes

  51. Your mutual faith and confidence, I am sure, are very highly commendable, but I just hope that you are right. Can I come back to both of your opening remarks and nothing I have heard since has alleviated my concern. Professor Buiter, you spoke about the disadvantage of two, let alone three, football teams, and I could not agree more, and then I think it is right that, Professor Goodhart, you went on to talk about the preference for groups in order to keep overall numbers down. My question is, therefore, a very practical one. What do you think would be the best way of forming those groups and how do you avoid the question of nationality which, by definition, the formation of the groups is meant to at least reduce? Do you not just take it down one tier? Are you not back into a nationality battle, if I can put it that way, within the formation of the groups?
  (Professor Goodhart) Well, I was thinking of what groups I would have and one of the difficulties is that it is very difficult to do it in a way that you align reasonably alike countries and have them more or less of the same size with respect to GDP and population. The difficulty is actually Willem's Netherlands; because if you put Germany and Austria together, in a sense the most akin country is the Netherlands, but that overweights it. You can put France, Belgium and Luxembourg together and then if you put the Netherlands with them, they are slightly out of kilter. Then you can have the Atlanticists of Spain, Portugal and Ireland, and then you can have the Mediterraneans of Italy, Greece, Malta and Cyprus, and then you can have the Eastern Europeans with Finland and that would actually fit quite nicely. The problem then is where you put the Netherlands. Maybe you could put the Netherlands with Spain, Portugal and Ireland, but I will leave that one.


  52. Maybe the UK will join and we will go with the Netherlands!
  (Professor Buiter) We spent 80 years trying to get away from Spain! I think it would be more logical to put us with the Scandinavians; the Netherlands is a Scandinavian country that floated south.

Lord Geddes

  53. If I can follow that up, Professor Buiter, you made the comment that you would like to see the election, though I do not know if that is the word you used, or appointment on the basis of expertise rather than on the basis of nationality.
  (Professor Buiter) Yes.

  54. I come back to my basic practical premise which is how are you going to avoid the nationality issue? It is inevitably, in my opinion, going to arise.
  (Professor Buiter) I think that you are right for the foreseeable future. However, if you look at the Bank of England example, it is clear that there were no quotas for the four nations that make up the United Kingdom. There were no Welsh, English, Scottish and Northern Ireland quotas. That is something that you will see only in the long run in the ECB. I think for the time being we are going to be stuck with this very uncomfortable paradox of an institution with a euro area-wide mandate, and specifically charged to ignore national considerations and not to take orders from national authorities, yet with the majority of the Governing Council, selected not on competency grounds, but subject to nationality constraints. It is just not possible to get away from it soon. I think the constituency system that Charles proposed is a way of managing it more effectively, also it reduces the number of people talking at the same time, and that could be a good thing.

Lord St John of Bletso

  55. If I could just revert to the issue of accountability and transparency, the Bank of England's inflation forecast later this week and the minutes of the Monetary Policy Committee next week, 21st May, does this not set a standard for greater accountability and transparency to be shown in the ECB?
  (Professor Buiter) Yes, it is clear it is a better system.

  56. What is the likelihood of that?
  (Professor Buiter) We will get there. It is not ruled out by the Treaty. It is a question of majority inside the Governing Council and with the Scandinavians and I hope in due course also the UK joining and with the East Europeans coming in, I think that before too long there will be a majority for enhanced procedural transparency and decision-making transparency.

Lord Lea of Crondall

  57. Could I just add a supplementary to that because we have had a bit of a debate following our report three years ago, How is the Euro Working, and we touched a little bit on whether we should publish the minutes and so on. We concluded at that time that we should not publish the minutes and the reason we reached that view was that it would say, "France said this, Germany said that". Somebody said, "Why not `anonymise' the minutes and then publish them", but does that still not make it a very easy target for journalists to say, "Well, that must be Germany and that must be France"?
  (Professor Buiter) You see, I do not mind the minutes being attributed. In the UK they are not attributed and I have no quarrel with that. The reason for not attributing it is that people would stop speaking freely and would read prepared statements into the record. I am not that concerned about that, and if there is concern about this, then it is an easy step to adopt the British system where views are represented, a whole range of views, but without attributing them. The British press have got quite expert at signal extraction and figuring out who said what to whom, but that is all right because it keeps the journalists occupied!
  (Professor Goodhart) It was also easy actually to figure out who said what and whose views because the votes were actually identified. I would have assumed that in the ECB with its national make-up, if there was any statement about votes, it would simply be numbers rather than identification and I think that that would actually make the ability to identify who said what really in terms of views also much more difficult. May I add just one other word, which is that the ECB argues that the present system of providing information through the immediate press conference is at least as good. Now, I have my doubts about that and the reason is that the press conference actually takes place pretty much immediately after the Governing Council. Now, my experience of being part of the MPC was that the exercise of taking part in the discussion was actually quite a tiring one and it was difficult to extract immediately after a fairly thorough, and I will not say "heated", but certainly involved discussion all the various nuances. To put a President, however able, up immediately, and after this long and tiring discussion, before a group of journalists without having had time to reflect and prepare is, I think, really quite dangerous. As I read it, and this is as an outsider, many of the presentational problems actually have arisen as a result of statements made at that press conference which, if the President had been somewhat fresher and had had time to prepare for that press conference with some longer delay, would have been better done.
  (Professor Buiter) On the point about the votes, I think it is central that the votes be easily identifiable precisely because that is the only way to prevent people voting according to the national party line consistently and getting away with it. There is nothing worse than smoke-filled rooms and not knowing who voted which way, for allowing national biases to be expressed without punishment. With the votes in the open, the European Parliament can very easily call to account a governor whose pattern of voting clearly makes no sense from the EU area point of view, but makes perfect sense from a national point of view, so I think this is even more important than the minutes, the individually identified votes. The press conference immediately following the meeting is, I think, counterproductive, I agree with Charles, and certainly no substitute for minutes, attributed or not.

Lord Hannay of Chiswick

  58. On the penultimate point you made about the identification of votes and, therefore, national identification of votes bringing its own punishment, I do not quite understand what you think the punishment would be. Most people who would conform to their national position in such a function would consider it themselves to be something they could be proud of. Now, that may be wrong in the running of the ECB, and I agree with that, but the argument against identifying national votes is that there is no punishment, but, quite the contrary, you do get punished if you do not express a view which is in conformity with what is perceived as the national interest. Do I perhaps detect a slightly greater tendency in your replies on these transparency and publication points than there was in the proposals made very shortly after the ECB was set up to recognise that basically we are dealing with a new animal which is going to evolve in a sui generis way and that simply replicating what works pretty well in this country is not necessarily going to be quite right for this other animal?
  (Professor Buiter) No, I have never considered the British model to be fully transplantable into any other setting. The British model is, I think, very good across the board but could be improved in some aspects. The fact that one person sets the operational target is, I think, a shortcoming. And the short term of the external mandates, renewable, I think, is a weakness, and there are a few other things. The authority of the Treasury to repatriate the rate-setting powers again at the discretion of the Chancellor is something which I think is not compatible with operational independence, so I think it could be improved. However, even if you have confidential votes or even if you do not have votes, which apparently is the case quite often with the ECB, and the consensus simply emerges, I am convinced that within five minutes of the decision having been made, those national governments capable of applying appropriate sticks and carrots for good or bad behaviour of the various representatives will know who did what to whom, but it is not usable in the public domain by the European Parliament. So you can hide behind confidentiality if you want to refuse to answer questions about voting in a particular way, whilst at the same time the ability to pervert or undermine the pan-European objectives and the need to pay attention only to these European-wide objectives is maintained. The current system is the worst of all possible worlds. If you could really keep the deliberations and votes secret, there might be an argument for doing it, though I still would not buy it, but that would be a reasonably acceptable alternative, but this kind of, "We know, but we can't call it to account" is the worst of all possible worlds.
  (Professor Goodhart) I very much agree with the whole thrust of your question and this is one area where Willem and I disagree. I think that the pressure on the national central bank governors would mainly come from, if you like, the tabloid press. So if you are in a country which has a much higher inflation and you vote, because it is appropriate in the euro zone as a whole, that there should be more expansion and the tabloid press says, "What on earth are you doing?" I think that the pressure, not so much from central government, but from more popular opinion would be much more that the NCB governors should vote in the way, if you like, the populace thinks they ought to rather than otherwise. I actually favour publicising the number of votes and `anonymising' who voted for what and again publicising views, but `anonymising' who said what.

Lord Armstrong of Illminster

  59. I think Professor Buiter has largely answered this question. I am afraid I do not know how often these matters proceed to a formal vote and how often they are decided by consensus which is not a formal vote. I should imagine that they try to get to the latter as often as possible.
  (Professor Buiter) Yes, that is correct. That is my understanding and the way they describe it themselves, yes.
  (Professor Goodhart) I had rather assumed that they do both, that they take a sort of straw poll and if it is clear that the majority is one way or the other and it is a clear majority, the President says, "Can I assume that there is now a consensus in favour?" My guess is that they claim that they never take a vote and it is always by consensus, and this is probably true as a matter of fact, but that there is a kind of straw poll taken first to decide whether there is a consensus or not.

  Lord Armstrong of Illminster: I am very familiar with a system in which heads are informally counted and the decision emerges as a unanimous decision of the body concerned.

Lord Lea of Crondall

  60. I think it would be okay if we were living in Plato's Republic where we could sneer at the populace and that would not matter, but we cannot. I used to be a trade union official and the argument now about accountability is essential for public support and we must get public support. We cannot sneer at the populace. Now, I, on balance, for what it is worth, am on Professor Goodhart's side at the moment, though I may have to shift to Professor Buiter's side, but I think it is a very balanced argument, that, on the one hand, I think, to sum it up, you have both said that France may have to read out a speech because it is a French speech and, on the other hand, and this is the reply to Lord Hannay, you would be shamed if it was only felt that you were a eunuch reading out a French speech, and that is where we are at the moment. Is that not a fair summary?
  (Professor Buiter) I personally do not see the problem. I have never understood, I may be terribly naive, these terrible pressures that would be applied. The tabloids or the people that appointed me to the job are not going to take my family hostage. Really, any central banker who is seriously worried about what the tabloids write about his or her vote, should be looking for another job. It is not a consideration that plays a role. The truth of a particular proposition is not determined by the number of people who believe in it or the amount of voice that they can give to that particular view. I really think that the issue of pressure is probably overstated. To the extent that it is there, I think open doors, open windows is the best way to deal with undue and inappropriate influence issues.
  (Professor Goodhart) You have got to take notice of the fact that in many European areas, for example, in the law, in the European Court of Justice, there is a tradition on the Continent of a much more `collectivist' approach in these areas in which you present a collegiate, single face to the public at large. The ECB does firmly believe in that approach. It shows in many European aspects. It is rather different from the approach taken in the UK, but it is a position which is very strongly held in many European bodies. Given that, I am rather unwilling to challenge it directly and say that the British approach is necessarily better.

  Chairman: Thank you very much. Are there any further questions? Well, may I thank you for your extremely informative and, at times, very entertaining evidence. Thank you.

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