Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 121-139)




  121. Welcome. We are extremely grateful that you have come before us. We understand you have to be away by 11, so we will stop at 11 or before. Is there anything you would like to say to us?

  (Mr Volcker) I have no statement, my Lord Chairman, but it occurred to me thinking about this last night—and looking at the questions you asked, which were rather astute questions—of how you run committees, or councils, with so many countries and members. There is a certain challenge for which there is no certain answer. When I learned public administration, this little couplet of Alexander Pope of several hundred years ago kept running in my mind, which to the best of my memory said: "For forms of government let fools contest, whate'er is best administer'd is best".

  122. That is the answer to all of the questions we are going to ask I would say.

  A. I can now go and get the taxi.

  123. If I can just kick off the session by asking you a very general question. How do you think the European Central Bank has done since its inception?

  A. I think it has done well considering the challenge it has of getting cohesion among however many voices there are, 13 countries now, or 12, whatever it is. Obviously, they were pre-occupied, I think with some justice, in establishing their credibility as an inflation fighter and concern about inflation. I think they have done that rather successfully. I know there are questions about whether they have been a little too assiduous, or self-conscious about that when the economy in Europe generally has not been ebullient, but I have no real criticism of what they have done. I think they have gone a long way in establishing the legitimacy and the authority of the institution.

  124. Is that an implied criticism then?

  A. No. I think, on balance, they have done a good job. I think it is unfortunate they have had this controversy initially about the chairman, and I assume this has been resolved by the court decision in Paris and that will proceed smoothly. The seeming national contest over that position is a little unfortunate, but I think we have seen that satisfactorily resolved.

Lord Lamont of Lerwick

  125. Mr Volcker, you were once quoted in the House of Commons by Nigel Lawson in answer to the question: "Can you have a single currency without a single government?", as saying: "Not for long". I do not know whether you have met him, but Lord Lawson is a very fastidious person, so I assume it was correct. Is there anything in the experience of the operation of the Central Bank that either confirms or lessens that view?

  A. It always struck me as a rather peculiar institutional structure where you have this strong Central Bank for all of Europe and it should be independent—I do not dispute the independence—without any body of a governmental sort and a political sort with which to interact. That raises questions of accountability and I think that problem exists, to some extent, here. As I see it, there is no counterpart to present a kind of governmental counterpoint to their discussions and I rather miss that. I am used to that in the United States and it seems rather strange that it is missing here, but I understand it is a unique situation in Europe. I do not want to raise any questions about the stability of the situation. You are struggling with a new constitution here. Ideally, I would think that might end up with a more cohesive political counterpoint for the independent Central Bank where the communication has a natural channel.

  126. One of the points that has been made by some of the witnesses when they have appeared before here is that whilst accepting, as you accept, the success—and I agree with this—in fighting inflation, if by any chance the eurozone got into a deflationary situation—that may be thought to be unlikely but if by any chance that arose—the model of a very independent bank but with 12 different national governments, not one but 12, independent from it, would make it very difficult, for example, to manipulate bond yields, to create inflationary expectations, to have the co-ordination of fiscal policy, or the monetisation of debts. I do not know whether that might be one argument that might have been consistent with your reported earlier remark?

  A. I do not know why the situation would change, particularly if you did get into a deflation which, frankly, I do not consider an imminent threat. There is always the question of the single minded pursuit of an inflation target—frankly, I hate those words inflation target—if you were in a deflationary environment in Europe, presumably the ECB's own objective would demand the expansionary monetary policy, even if you could have differences among the 12 member governments I would think. It sounds like a pretty straightforward situation where its own mandate would suggest full speed ahead sort of in an expansionary policy, and its particular institutional structure would not seem to me to inhibit that in that situation.

Lord Lea of Crondall

  127. Mr Volcker, I was struck by your remark that you find it a bit odd from your very experience that you do not see counterpoint/counterpart on the political side vis-a"-vis the economic side to the role of the Central Bank comparing Washington with Europe. Can I probe that a little further and ask is this a question of uncertainty about the goals which are set, because that is one set of thoughts, is it not? In Europe, in one sense, it is the ECB that has got near enough to the symmetrical goal of around two per cent inflation, it is not something the Maastricht Treaty set, whereas I think I am right in saying, am I not, that in Washington the relationship is slightly different? I think you have goals of economic development, employment, or something like that, as well as monetary stability about the actual numbers and who sets them. What is the nature of the dialogue that you think you are missing? Dickensianism went out of fashion, did it not, and it was not that you wanted fiscal policy, so you cannot remember monetary policy, what is it you are missing?

  A. Obviously, I come from a particular environment where we have a government, sometimes it is not a very organised government, but it is a government, and you have an independent Central Bank. I think for a Central Bank to have independence, which is appropriate, it has also to accept a degree of openness and accountability in a democracy which is reflected in considerable part in the United States with interaction with the Congress, which in my impression is somewhat more rigorous than is the case of the Central Bank here with the European Parliament. Of course, the European Parliament does not have the authority that the American Congress has, but also inevitably we in the US have constant interaction with the administration. The Federal Reserve is sitting there in Washington, there is a tradition, for instance, of the secretary of the Treasury meeting with the Chairman of the Federal Reserve at least once a week, and there has seldom been an atmosphere where that has not taken place. You naturally engage in a quasi-public debate and have to defend yourself from administration comments. That is all part of the natural evolution, which I think avoids the Central Bank from becoming too isolated which is, I suppose, conceivable here. The Central Bank is not a creation of the European Council, or the European Parliament, it is there in the treaty; it is in the constitution in effect. That is not the case in the United States. We like to think the Federal Reserve is independent, but we never forget that we are there because of a law that the Congress has passed and can change. I think it would take a lot of aggravation for them to change that, given that tradition of independence and all the rest, but we are a creature of the Congress and not of an InterGovernmental Treaty, which is different. So I think the independence has to be balanced with accountability. It can take various forms, but I rather miss the by-play you would get with a strong executive.

Lord Geddes

  128. Mr Volcker, you mentioned right at the beginning of your reply to Lord Lea your consideration of the importance of openness and accountability. Can I just swing on to the last two questions that we have about the unattributed minutes of meetings and ask whether you think the result of votes should be published and, if so, should the individual be named, or should they just be what were the numbers for and against, et cetera? I would rather you spoke rather than I ask the questions, but I think you know what my questions are.

  A. I saw those questions. I think they are interesting questions and I thought about them a bit. In the United States these days, and for a long time, we have published the minutes of the Open Market Committee Meetings—in an abbreviated minute of a meeting, but an accurate reflection of the discussion—with a lag of some weeks. The idea, originally anyway, was to publish the discussion right after the next meeting, so it would not lead to market anticipations in between meetings, and with names, if there was a dissent, the dissent was noted and the vote was noted. That seems like a natural thing to do, but I can understand the particular situation you had in Europe with a new Central Bank and with national Central Bank governors represented on the Council. I do not know what was in the minds, but I would have a concern that publishing the names and maybe even the discussion, would run some risk of opening a debate about the national interest and whether a particular governor was suitably defending the interest of his particular country, which in turn might lead to a national pressure that I think the whole enterprise was designed to dampen. The effect is to bring people together in terms of what they thought was best for the whole monetary union or, obviously, the whole of Europe—you are in it anyway—and minimise what might be seen as a defence of purely national interest and opening up to the pressure that would exert. So I think I came away, when I thought about this, that maybe for the time being anyway not publishing the vote was appropriate. Now, my understanding is—and you know more about it than I do—when they announce a decision it is always presented as a consensus and they do not take a vote. If they claim they do not take a vote, they must have some sense of it. That does not seem to me too bad for their opening years anyway. Maybe some day they will get more accustomed to this, and any feeling of particular national interest being pushed excessively will diminish and they will go towards more reporting. I do not see any reason there could not be some reporting of the nature of the debate after maybe a suitable interval. Europe does announce what they have done right away, which the Federal Reserve now does, and I take it that at that press conference there is some explanation and some flavour of why they take the decision they do certainly. I do not know whether there is much flavour of whether there is dissent or disagreement within the Committee. Clearly they have tried to present a united front. I think there is a cost in publishing names and publishing all the debate. From my standpoint—and I speak from the perspective of an ex-chairman of a Central Bank with a members' board—you want to present a decision that has a maximum amount of credibility and creates a maximum amount of confidence in the market. You can create the impression: "We had a big debate and it was very narrowly decided and, finally, we decided on balance to go in this direction, but we do not feel very strongly about it", which may be the result sometimes of publishing votes. When I first became Chairman of the Federal Reserve I had an experience which made an indelible impression upon me at the time. We had a lot of inflation, we had problems with our credibility and it was clear, in my view when I took office, we had to tighten money. Shortly after I took office we raised the discount rate by a considerable amount (that was the decision of the board of governors technically, not the whole Open Market Committee) and that you do immediately announce it and you announce the vote. The vote was four to three, which did not bother me at the time, naively, because I knew there were four votes there and if we had to raise the discount rate again the four votes would still be there. But the market interpreted the narrow margin as a great sign of weakness. Instead of getting any credit for tightening money the interpretation was—I am exaggerating—"The Federal Reserve is finished. They are now down to a four to three vote. They will never be able to increase it again". It had absolutely the opposite effect than, obviously, we were searching for in making what I thought was a fairly decisive change in the discount rate. So you have that kind of a problem. You want to present as strong and as united a front as you can.

Lord St John of Bletso

  129. If I can move from accountability to monetary policy. Lord Lamont mentioned earlier on the spectre, the fear of deflation. My question is really following the comments by Ben Bernanke who has been talking about taking a more unconventional approach with the Fed to stimulate the US economy, and here I have voted buying back Treasury stock, or committing to longer-term interest rates, fixing interest rates at certain levels. Do you think this is a viable option? Really taking it from the Fed, do you think that model could possibly be transposed with the European Central Bank again?

  A. First of all, in the American context, I am not one who shares a great fear of a deflation in the United States. I think that is a very remote possibility, to the point where I do not even think it is a possibility. It really surprises me there is all this discussion at a time when the economy is growing, maybe at not an unreasonable rate of speed considering we did not have much of a recession, and the inflation rate is between two and three per cent. We used to call that inflation, not stability, but the nomenclature has changed. So I am not one who sits worrying about protection against deflation. On the other hand, when Bernanke spoke about using unorthodox tools, I am old enough so I remember the days when it was perfectly orthodox to intervene in all parts of the bond markets. We did it every day almost; every day is an exaggeration. When I first joined the Federal Reserve I sat on the trading desk for a while. I was one of those people trading Government securities and it was an ordinary part of policy to intervene in the long-term market. For many years, which does not go beyond my day, the government bond rate was maintained very strictly at two and a half per cent by Federal Reserve action. That was first a reflection of the depression and then the war time situation, and it was carried over for five years, I guess, after the war. Even after the rigid pegging of the rate was stopped, it was not unusual to intervene in different areas of the market. That approach was largely abandoned in the mid-50s and what is considered today more orthodox Central Bank policy is to only intervene in short-term securities in the money market, but I do not consider the broader approach wholly outmoded. I think it would be more difficult for the European Bank where there is no uniform securities into which to intervene. I think they would have a real technical problem. It is clear the United States intervenes basically in US Treasury securities, although that has not always been true. Sometimes we have intervened in so-called agency securities that are not fully guaranteed by the government.

Lord Marlesford

  130. Mr Volcker, I was reading with great interest the evidence you gave to this Committee on 24 March 1998. I was not here, but Lord St John was. I think he is the only person who was here then.

  A. That is unfair, I did not go back and read it.

  131. It reads extremely well, if I may say so. The particular point that I would like to raise with you is the exchange rate policy because you said there were some pressures, but your main concern was: "We would end up with two major currencies that are more volatile between each other than they are now", that is a quote. You said: "That this could lead to drifting apart, trade disputes, questions about relative burdens of stability. I think it is a real danger that needs to be guarded against and a major problem". Obviously, that is exactly what has happened in a very big way, just as in Europe anyway, we feel—or some of us feel—there is a greater danger of deflation than inflation, certainly in the case of the two biggest economies in the eurozone, because the tenor of your remarks is that central bankers cannot ignore exchange rates. I wonder if you would like to say something about how the Fed handles this in the light of the fact that the euro has appreciated by over 40 per cent for the dollar? What do you feel should be done now?

  A. My view on this matter has not changed, but there are no easy answers. I think generally central banks and governments—and particularly in the big countries and particularly in the biggest economic areas, Europe and the United States—have been very blasé, to say the least, about exchange rate movements. It is hard for me to believe that the size of the exchange rate movement we have seen up and down against the euro, for instance, is entirely benign in terms of its impact on the structure of the economy and economic activity. We are running, as you well know, a very large current account deficit in the United States, and we began that and it has persisted during a period of, I think it is fair to say, high valuation of the dollar. Now, against the euro that has been reversed at a time when it is not very convenient for Europe, in terms of its rather sluggish economic performance, and the pressures come very directly on Europe. It is one factor among many affecting the economy, but it does not affect it right at the moment in a very happy kind of way. Frankly, I think the bigger problem structurally is small countries find it very difficult to adjust to these volatile exchange markets and the basic problem, I am afraid, is that in the United States, we have long said: "We have a big continental economy, the exchange rate affects a relatively small fraction of that economy. . ."—a bigger fraction than it used to be, but still a relatively small fraction - "...and we should not change policies that otherwise seem appropriate and worry about the exchange rate". Europeans used to criticise that attitude, but now you have a monetary unit equally as large, or roughly as large as the United States, my observation is you take exactly the same attitude—the Central Bank does and the governments do—that the United States has taken: you have a big cohesive, stable, current economy and stable currency internally, let us not be bothered affecting monetary policy by worrying about the exchange rate. I understand that attitude, but I think it is unfortunate. Now, to get to the institutional side of Europe, as I understand it, there is a provision in the Maastricht Treaty—which I used to be able to quote, but I have forgotten—that said exchange rate policy is really a matter for the European Council in some kind of consultation with the Central Bank. I asked some of my Central Bank friends years ago what that meant. I am afraid the answer I got was, in their view, nothing. They were basically in charge of monetary policy and the goal of monetary policy was stability of the price index in Europe and the absence of inflation in Europe, and in that context they really could not afford to worry much about the exchange rate. Now, this problem institutionally arises in every government. You ask what our attitude is in the United States. Frankly, the attitude in the Central Bank has been one of what I describe as, "Let us not worry about it", normally. Now, there have been exceptions to that when you get the feeling of psychological emergency which has happened from time to time, but not recently. Then there is the big question in the United States and in every government, of who is in charge of exchange rate policy. In the United States the Treasury claims primacy; I used to claim that when I was in the Treasury. Frankly, there is no legal basis for that, but it is the custom. If the Government is in charge of exchange rate policy, but the biggest most fundamental influence on the exchange rate policy is monetary policy, it is inherently a strange and difficult situation, which basically every country has faced and reached its own kind of practical compromise, or sometimes conflict. I do not have any solution to it, except I do believe whoever controls the policy it is unfortunate more attention has not been paid to the desirability of not fixing the exchange rate but avoiding these really extreme movements. The movements have been bigger with the yen and the dollar than with the euro and the dollar. We talk about swings of 30-35 per cent with the euro, they have been 50 per cent with the yen over very limited periods of time. It is a matter of frustration to me because I do not think that had to be. Typical economic theory these days is that you cannot control the exchange rate; you cannot influence the exchange market without damaging exchange rate objectives. I do not believe that but that is the belief.

Lord Hannay of Chiswick

  132. Could I go back to the question of a proper policy political interlocutor for the European Central Bank whose absence is deplored. Would you think that, over time, it would make sense if such a body emerged, for instance in the form of the strengthened powers for the eurogroup countries, which has been proposed in the Convention? If such an interlocutor emerged, would you see it as desirable that that interlocutor should become the body that sets an inflation target for the Central Bank, rather in the way that the Chancellor of the Exchequer in this country sets an inflation target for the Bank of England? It would be interesting to hear your views on that. Secondly, I wonder if you could comment a bit on the relative importance, in your view, for example, of the Chairman of the Fed's and the European Central Bank's public statement in determining the mood of the markets and the reaction to various decisions. There has been much praise of your successor at the Federal Reserve and quite a lot of criticism of the first Chairman of the European Central Bank in that respect. I wonder if you could set that in a better perspective and say whether you think it has really mattered very much or whether it is just the trivia of the day-to-day financial gossip.

  A. On the first question, who should set the targets, so to speak. Certainly in the United States it is the Federal Reserve that has done it with a much vaguer mandate from the Congress, which talks about growth and stability and external equilibrium. It talks about enough things and so you have enough freedom for setting the target! But that is also in the context of the public depending on acceptability, as all these things are. It is now, I think, well understood around the world that a primary objective of monetary policy should be price stability. If they forget about that, the other objectives are not going to be very satisfactory. I really think that if you are going to have a truly independent Central Bank, it ought to be the one to set the target. They are doing it in Europe within pretty tough strictures set down by the Maastricht Treaty that says, "Your job is stability and that is the overriding goal of policy". In some sense, they are setting a precise target. It is a technical matter because it has to conform with a stronger statement than we have in the United States about the guidelines for policy. The question of the Chairman and his statements which inevitably are going to have some influence. I do not know what you can say other than that depends upon the good judgment of the Chairman and how he attempts to indicate what he thinks is appropriate to the market to better inform the market. Consistent with my earlier comments, what turns the Chairman's hair grey, if it is not already grey, is when all members of the Board are speaking to the public and not speaking consistently. I think if it is going to have a coherent statement of policy, the burden is pretty heavily on the Chairman's statements. He can pick the time and place that he thinks is appropriate to the extent possible, which is not always possible, and the others keep quiet. I would not carry that so far as saying if there is a genuine disagreement on the Board and somebody feels strongly that policy should be different he not is entitled to say so. I think he is a member of the Board but when he tries to explain existing policy, sometimes you get into difficulties. You just give a little different twist, and you have had incidents of that in Europe. Occasionally it happens in the United States but I do not think there is any general statement you can make about how the Chairman manages public statements which is his responsibility. By and large, I think members of the European Central Bank Board or the Federal Reserve Board have respected that and they understand that the Chairman has to carry the burden and it is his responsibility in the interests of everybody to give the coherent public explanation.

  Chairman: I was just thinking, when you were talking about the need for the President to be clear in his statements, did not the Chairman Greenspan say something like, when he was talking to a Congressional inquiry, and I paraphrase, "If you understand what I mean, then you must have got it wrong"?

Lord Lamont of Lerwick

  133. "If I have made myself clear, you have misunderstood me."

  A. It was a wonderful statement. Every Central Bank President has sympathy for it.

Lord Sheldon

  134. It was an important comment you make that an important task you were performing was the interaction with the Administration. That is very important; it gives you wider consideration of all sorts of other matters which you may need to take into account. Of course, in the European Community we do not have that kind of administration and we do not actually trust. I know there is not much trust between people in these matters, but there is more trust than there is of course in the European Community because they have different agendas and different stages of economic development. With not having an administration, is it possible to get some form of consulting body that perhaps might be sufficiently important to have some bearing on these matters? Should there be some device to get some regular contact between the European Central Bank and maybe some form of committee of finance ministers, or something like that? Do you think there is much in that at all?

  A. The obvious point I give from the standpoint of the United States—and the setting is slightly different here—is that reporting to the parliament would be an occasion for explanation of policy and broaching inquiries as to what it is about and debate about the appropriateness of policy. That is the primary public vehicle in the United States in a formal way and it has been true for years. I think it works pretty well. My sense is that here it has been a much weaker forum than it is in the United States, and that may be partly—and this was one of your questions - as to whether members of the parliament should vote on members of the governing council or the executive body in Frankfurt, which seems to me a fairly natural thing to do. Again, and it comes from my experience, when I saw that question, I said to myself, "Why not?" Apparently they now appear but there is no vote. They have to present themselves and be subject to some inquiry but, at the end of the day, there is no vote. I would think the responsibility of the vote may change the psychology a little bit and make reporting to the parliament potentially more meaningful, if it is not meaningful now. I am just repeating what I read.

  135. The Council of Ministers could not meet as frequently as you did with the Administration, of course?

  A. In the United States the formal testimony is twice a year but you know what that means: it is twice a year for the House of Representatives and twice a year for the Senate and they tend to come at the same time. Committees want to hear from you and they are not bashful in calling you up at other times on particular points. I know one year it seemed to me that I appeared before Congress 35 times in one year, which was a little too much. Of course that is my view. You have legislation. The Federal Reserve itself has legislation that they are interested in. Certainly they are interested in commenting on other financial legislation that affects their responsibilities and may have some very strong opinions, so you want to testify and make sure that your opinions are heard. It depends partly on what the legislative calendar is. I am not sure that kind of interplay takes place in Europe. We do not have legislative process.

  136. But your feet are closer to the ground in the Fed than is the case in the European Central Bank?

  A. Yes, there is some sense in which that is true.

Lord Lamont of Lerwick

  137. If I might boringly turn to the question of Lord St John, you were saying that you thought the risk of deflation was remote. That is certainly what most official spokesmen say.

  A. I am talking about in the United States.

  138. Yes, but I was about to say that it depends perhaps in Europe on whether you look at the eurozone as a whole or at individual countries. Obviously, if you have a currency union, the way in which it will work for some countries will be relative disinflation, as France had in the Eighties for a long period of time, and as Germany is having now. I think the concern is that it might be better if all this happened quickly but the signs are that all this could drag on for a very long time. Germany's deflation looks almost certain to last a few years. There are countries like Austria which sends I think about half its exports to Germany. The Netherlands has a very high proportion of its exports to Germany and the Netherlands is now in recession. I think the fear is of the knock-on effects of this prolonged period of relative disinflation when combined, as Lord St John said, with the inability of the European Central Bank to manipulate bond yield because there is not one single bond market but there are a lot of different fiscal authorities. You have the limitation of the Stability and Growth Pact and it is more difficult for the ECB to create an expectation of inflation or to talk up inflation in one country. I think that is the fear. There are a lot of statements by policy-makers saying that deflation is remote, but certainly in Europe it has come closer, despite those statements. I have a quite strong perception that in the financial markets there is a bigger expectation of it in Europe than is admitted by official spokesmen.

  A. I must confess that I have a semantic problem. We have got to define deflation. Is it the condition of an individual state in the United States or of a region in the United States? If you are operating close to price stability, which I would think is a desirable state of affairs, prices may be going up a little bit in some areas and prices may be going down a little bit in other areas and within the accuracy of price indices plus or minus a per cent or so isn't significant just because the figures are fuzzy. That is not to my mind deflation; that is stability. Once you say deflation, people say that deflation creates a fear of further deflation. If you think of the 1930s, that was not a case of price declines hovering around zero or minus 1 per cent; in the United States prices were declining by 10 per cent a year for several years in a row, with rising unemployment. You had something similar at one point in the UK. That is deflation. That is what you want to avoid. If you even make that a half or one-third of the 1930's experience, then you have got something I would call deflation. I do not know when the price index is fluctuating between zero and minus 1 per cent if it is deflation or stability. If that is deflation, the price index of 2.5 per cent plus that we have in the United States must be inflation, if you have symmetrical semantics. Germany has some special problems. I do not know but I think the aggregate data still reflect problems from unification. It is just symptomatic of how long these adjustments take; there are a lot of internal problems there. But Germany is a big enough unit so that if it is declining in economic activity, and let me use that term instead of deflation, that certainly has got to be an influence on Central Bank policy in Europe. If activity is actually declining in Germany or not growing, and that is a quarter of the European economy or whatever it is, it has an effect on its immediate neighbours and also an effect on the exchange rate appreciation. Sure, that is a problem, and it should affect monetary policy. I think that would be true whether the prices were rising by 1 per cent or whether they are at zero or declining by 0.5 or 1 per cent. I am not sure that would change my judgment all that much. It is a problem that should be met by more expansionary monetary policy.

Lord Armstrong of Ilminster

  139. In an earlier answer I think you said or implied that when you were the Chairman of the Fed you rather welcomed the broad nature of the objective which you were given—broad in the sense that it covered employment and interest rates as well as price stability and broad in the sense that there were no numerical targets in all of this. Of course, this is different with the ECB where there is a haze of obscurity around the target, but it comes out somewhere like close under 2 per cent price inflation. With the Bank of England there is a very clear target. I wonder if you would like to elaborate on that, whether you feel that it is advantageous in terms of accountability that the Central Bank should have a rather more closely defined target?

  A. Well, I do not know whether I trust my own judgment on all these things. I had a sympathetic relationship with the idea of a more precise target for the Federal Reserve in terms of price stability, because obviously I agree that the central function of the Federal Reserve, the central purpose of any Central Bank, is stability with a capital "S". Stability to my mind goes beyond price stability. There are questions of the exchange rate stability and financial stability more generally. Occasionally proposals arose in the Congress with people wanting to be helpful who said, "Let us put that into law in a more precise way. Let us say you are talking about a price index of zero or 2 per cent" or something. Part of my hesitation about supporting that—and I cannot speak for Alan Greenspan but I suspect he may have the same feelings—is that once you put that debate in Congress, God knows what they would add to it. There would be other opinion in the Congress that said, "All right, 2 per cent, and now let us put in a 4 per cent unemployment rate target" or a target about the exchange rate or whatever. You would have a big debate, which would weaken the central point rather than strengthen it. I am not sure that is true in every country. I am not sure I am even right for the United States, but I do think the central point, and I am pretty well satisfied, has been true not just in the United States but elsewhere in the last 20 years in a way that it was not earlier. The overriding responsibility of a Central Bank is to be concerned about the price movement and the importance of achieving stability. That is why I am a little bit concerned—I made this comment in a speech in London some time ago and Eddie George was sitting there, to see whether I got a rise out of him but he did not have the opportunity to respond in that particular setting—and I find it odd that we call these things "inflation targets". If we are really saying that 2 per cent in the case of the UK is stability, let us call it a stability target. I want to avoid the impression that somehow you can solve your problems by having a little inflation. That is where I came in 50 years ago and that thinking got us into a lot of trouble. Once you really get those expectations of inflation going, they are very hard to change. So I feel, frankly, quite comfortable with the European Central Bank saying it would it not be all that precise about following every particular number but something between zero and 2 per cent seems appropriate, and that is stability. I would not call that an inflation target; that is my stability target. That is all semantics.

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