Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 80-84)



  80. In an ideal world do you see the role of the European Parliament being that of offering an opinion, or having a decision?
  (Professor Thygesen) I think it is enough they have an opinion and raise critical questions rather than a full confirmation hearing which they could potentially reject. I imagine there could be sufficiently strong opposition with the European Parliament for a nomination to have difficulties.
  (Dr Schmieding) On the last question, as long as the European Parliament does not have the role which a national parliament has in a national context, I think the European Parliament should not be the body actually making the appointment. I think the carve-up of the Executive Board, the appointment of the first President was probably unfortunate in the way it happened. But appointing the Executive Board of the Bank is indeed a highly political decision with legitimate interest of the senior politicians to take great care that they choose the right candidate because, given the independence of the ECB, they would then have to live with the consequences of that for a long time. I think this power should remain with the highest political body that the EU has, which of course is ultimately the EU Summit. We can discuss whether the procedure may perhaps be streamlined or may be improved a bit, for instance, by saying that an initial list of candidates could be drawn up publicly by the EC Commission, and that possibly the EU Council could only pick candidates which neither the ECB nor the European Parliament have objected to. That would constrain the choices of the EU Council. But I do not think that at the moment and for the foreseeable future, with the EU being a multi-national institution and definitely not a nation state and not going to be one for a long time, that one should be going any further down the integrationist route.

  Chairman: I am interested you do not think that something more ought to be done to prevent a repetition of the 1999 experience. After all, I suppose it is not inconceivable that the Intergovernmental Conference could actually make it impossible to have a split mandate decided then, of course not legally but in practice. In my personal opinion, that was an appalling precedent to set and one which should never, never be followed again. If you did it a second time it would become endemic, almost certainly.

  Lord Lea of Crondall: When we concluded our discussions about all these particular points, whether the minutes should be published and so, we still have in Europe a debate, an anxiety about what a lot of people call "the democratic deficit/democratic accountability". It will not go away. It may be a total misconception and everybody around Europe is confused. That is not our problem and people ought to be educated to realise how good things are. When we reported last time on how the European Central Bank was working, this Committee reported three years ago and thought it was getting a good mark and we should not publish the minutes because national representatives should not be put under pressure to be shown how good they were or how they could be thought to have acted badly, which was the converse. The problem about democratic accountability will not go away. I would like to ask one general question: is there anything you could say that could help us at all, or do you not think that is a problem?


  81. I think Dr Schmieding actually did say that there should be a progressive movement in the direction you are saying.
  (Professor Thygesen) I accept that that would be desirable but it may be too long, drawn-out a process to satisfy the electorate in several countries. We have to take into account that this is an expanding club. Probably over the next decade we will have as many as ten more members of the euro area and the ECB. I think with the new Member States it could be a problem to have individual votes accounted for. I note a question that was put in the questionnaire: is it not enough that members of the ECB and members of the Governing Council are independent and are not allowed to seek or receive instructions. That is not the whole issue, of course. They would be subject to a lot of scrutiny at home in the press if their precise voting were reported. It could also lead to a tendency for more coalition building inside the ECB. I am a bit worried about doing it too soon. I agree, ideally, it would be a problem. The main point is that the national central bank governors can do a lot to explain the policy in their domestic context and take away some of the mystery that the ordinary voter might feel about the ECB practices. I recall the Finnish Governor told me once—when I asked him, "How can you communicate this?" he responded "I always am careful to say that it is also our policy, the policy of the Finnish participant in this process". I think there are things that can be done to alleviate the concerns of your question.

Lord Armstrong of Ilminster

  82. My question flows from what Lord Lea was asking. We in this country are used to a system whereby the Central Bank is formally accountable to Parliament and produces an annual report and all of that. What happens with the European Central Bank? Does something need to be remedied, or are the arrangements for giving evidence to the European Parliament, being transparent, sufficient for formal accountability?
  (Dr Schmieding) The ECB, to some extent, already does this by presenting an annual report to the European Parliament and appearing at the parliamentary commissions. The problem behind that is of course whether the EU Parliament is indeed the highest democratic body to which an institution such as the ECB should be accountable. If European integration were to go forward to such an extent that eventually the European Parliament would be seen as the prime body to which an institution could be accountable, that is as the prime body vested with actual decisions, then I think this mandate of the ECB should be strengthened in that sense. Otherwise I think we have little alternative but to stay with the two different pillars, namely of asking the ECB to enhance its transparency over time in ways which we have discussed and, of course, to let the senior EU politicians (that is ultimately the EU Summit, the highest legitimate body of power in the EU) make the crucial decisions about who actually serves on the Executive Board and possibly (this is something I would not be against) eventually with the broad majority formulate an explicit inflation objective.

Lord Marlesford

  83. With the Fed, the Chairman has for many decades been a very important person as far as markets are concerned, and never more with Mr Greenspan. This has not really happened so far with the ECB. Do you see the President of the ECB developing into a public figure who moves markets or does not move markets according to what he or she says? Would it be desirable that this should happen?
  (Professor Thygesen) It is true that the position of the Federal Reserve Chairman is much more significant in the public debate. His links to and (his knowledge of) the financial markets is no doubt deeper than that of the leadership in the ECB, partly because the mandate is a bit different. The Federal Reserve is very closely involved in banking supervision, for example. The Federal Reserve is also able to speak to some extent as a spokesman of the financial market, with the intimate knowledge of the chairman. That will only develop slowly obviously in Europe, but it will no doubt develop somewhat further. I do not think, however, that the European Central Bank President could ever quite reach that prominence. It was not always so in the United States. It depends crucially on personalities. Before Mr Greenspan there was a period of about 15 years when the position of the Fed Chairman was weaker. It depends crucially on the professional capacity of the chairman and his colleagues and that, of course, is a parameter that can always be re-strengthened potentially.
  (Dr Schmieding) It very much refers, of course, to personalities, but I would also like to point out that sometimes the perceptions of what moves markets may not be fully correct. It is very clear that the Fed President can move markets; but ECB policymakers move markets in pretty much a similar way. Of course they move smaller markets, that is the European markets and it is thus perhaps not noticed quite as much on the global stage. I think looking at central banks there is a general tendency, almost regardless of the formal strategy: What often moves markets expectations is speech. Regardless of the fact that the Fed has little of an explicit strategy, Mr Greenspan moves markets. Regardless of the ECB having the somewhat awkward compromise strategy, but having this strategy, it is often an interview by Mr Issing, a comment by Mr Papademos, or an interview by Mr Duisenberg that moves markets. In that sense, apart from the personality issue, it is a fact that already ECB policymakers move their smaller markets with their comments, if they change expectations of what the bank is going to do, roughly as much as happens with policymakers in the US. I would not see any mechanism that needs to be strengthened in that.


  84. In your testimony you referred to the exchange rate situation, the markets. I would add to that the amateur but, I suspect, likely to be confirmed prediction that, as usual, exchange rates are heading for an overshoot. This clearly does present certain problems to policymakers in the euro zone and at the ECB. Did I correctly interpret your view, which seems to be the commonly held view, that the ECB not only should not be pursuing an exchange rate policy but that it would be unwise for the 12 to ask that it pursue one, or to set one themselves?
  (Professor Thygesen) My Lord Chairman, this is indeed a very difficult question. I think the ECB does in fact, although it tends to underplay that particular factor, take into account movements in the exchange rate. Obviously it has to do so because the impact on the price level in Europe is significant with the kinds of movements we have seen. For any central bank that looks at an inflation objective of some form or another, it has to go to the exchange rate. The question is whether it can do much about it. The strategy of having more explicit ideas about an exchange rate strategy was rejected when the ECB considered its options before it became operational. That would not be possible and it would, in any case, flounder on the difficulties of reaching an understanding with the United States in particular on how to do that. Now we may be approaching a situation where there is a bit more of a need to begin to talk about these things. However, I share your view that we could well be facing a period with an overshoot in the opposite direction to what we saw in the first two years in Europe. If it is of anything like the same size as that initial movement away from any longer term equilibrium then it could be quite damaging for the euro area economy. I do not think the ECB could formulate any strategy, nor should the Eurogroup try to do so. There should be more explicit commentary, particularly when the speed of movement of currencies is rapid. Maybe also occasional interventions. They did in fact do useful work in the Summer and the Fall of 2000 when the dip in the euro was reversed and that may have to come into play again, because the consequences of rapid appreciation are, in a sense, more burdensome and serious for Europe than they are for the United States where the increase in Europe's demand for US products is largely welcome at the present time. The link from interest rate changes to the exchange rate directly is a highly uncertain one, but no doubt it will have to be taken into account that there is probably some explanation for the strong euro in the somewhat higher interest rates in Europe today than in the United States.
  (Dr Schmieding) My Lord Chairman, this touches upon two issues. First of all, whether there should be or could be an exchange rate target; and, secondly, whether the exchange rates matters or not. As to an exchange rate target, I think such an arrangement is practical only in an asymmetric relationship when a small country pegs itself to a big one, so that there is no question as to who is the leader and who is the follower. In a European context, the euro zone relative to the US, I do not think that the euro zone would want to commit itself to following the US leadership, which an exchange rate target would entail; nor do I think it would be advisable as we do not know how, for instance, the strong dollar policy in the US may evolve in a matter of weeks, months or years. As to whether the exchange rate matters, indeed it matters significantly for economic growth and the inflation outlook. You initially provided a brief estimate of the impact of a ten per cent appreciation. For all I know the ECB is well aware of all these studies, is having internal results similar to that and will take the exchange rate significantly into account in its practical policy.

  Chairman: Thank you very much. I would like, on behalf of the Sub-Committee, if there are no more questions, to thank both our witnesses very warmly. As you will have gathered from the intensity of the questioning we would have spent even more time here if that even more sacred institution of the British lunch hour had not been about to intervene! I would like to say that the Sub-Committee is very grateful to you. Your testimony will greatly help us in our discussions. I hope that you will be interested in reading our Report in due course. Thank you very much.

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