Examination of Witness (Questions 200-209)
TUESDAY 15 JULY 2003
PROFESSOR MARIO
DRAGHI
200. I thought that was one of the most interesting
answers we have heard in the whole inquiry because it is a rationalisation
of what we are doing in a way but I had not heard it put quite
so succinctly. Just building on it, it is the theory of Europe
being bigger than the sum of its parts and this logically also
should apply to fiscal questions, should it not? We now have a
growth of stability pact side by side with the European Central
Bank, which is just looking at rules for the nation states. It
does not quite match the other half of the equation in economic
policy making whereby there is something called Europe which is
not just the sum of its parts. When we had Paul Falke here recently,
he was referring to the fact that the Fed's mandate is "to
promote effectively the goals of maximum employment, stable prices
and moderate long-term interest rates". Would you say that
on the slow growth in Europe which relates to all this, it is
not so much whether you say growth is part of the remit, but that
somehow the rest of economic policy needs a Solana or needs somebody
who can get hold of that at a high level alongside the European
Central Bank?
A. May I answer your question in two parts?
The first is: is there something beyond the monetary policy that
is needed to restore growth in continental Europe? The answer
is a resounding yes. Structural reforms would be the first on
the list. The main reason why the interest rates have not been
lowered at times was the absolute conviction of the ECB that were
they to lower interest rates further, there would immediately
be so-called supply constraints and prices would rise, even though
unemployment is still of the order of nine or ten per cent. So
I would start with structural reforms, which make the labour market
more flexible, as the very main issue generally removing the not-so-business-friendly
environment that you would see in some of the continental European
countries. That is absolutely essential. The second question is:
how does one view the stability pact in all this? You probably
have heard many opinions about the stability pact by now.
Chairman
201. We even have one of our own. We published
a report about it just before this.
A. One has to look at it in a sense with some
historical perspective. There is a spectrum here, one where each
Member State runs its own independent fiscal policy. So if we
take a snapshot, if we go back to 1991, when you had Italy running
an 11 per cent GDP deficit ratio, when you had Germany with two
per cent and you had everybody else in between. Would that be
a viable system? The answer is no, it just does not work. It does
not work anyway, but if you had one currency, it certainly would
not work for many, many obvious reasons. The other end of the
spectrum is one where you do not have independent national budgetary
policies. You only have one big European federal budget. Is that
realistic? That would work technically. Is it realistic politically?
It is not. If you look at the stability pact from this perspective,
you would consider that as something in between, something which
is a compromise between these two ends of the spectrum, something
which certainly made a strong political case in favour of the
monetary union in Germany at the time and in so doing certainly
helped the creation of the monetary union. I think that was the
main reason people considered at that time. Now the more time
passes, the more I am convinced that is a compromise. It has been
a good compromise, but like any compromise it can now be changed,
but it should be changed with a certain finesse. It should not
be changed in a way that we move all the way from one end to the
other end of the spectrum and go back to 1991 where everybody
really was doing whatever acting independently. We should not
change it and make it even less transparent than it is today,
for instance listing all possible exceptions. Why do we not, for
instance, consider defence expenditure? It is not in the budget,
it does not count. Then somebody else will come and ask why we
do not consider developing countries' aid expenditure? That does
not count, you take it off. Somebody else will ask about infrastructure
expenditure. I could go through the list because each one of the
items I have mentioned was at one time mentioned by this finance
minister or that prime minister as being the item which should
not count. So it has to be done with a certain finesse and it
should be done. There is a strong political case now for implementing
it if you consider the total inaction of budgetary policy on the
continent and compare it with the exasperating activism of budgetary
policy in the United States. My sense is that many European governments
now feel they would like to act, they cannot act, but most importantly,
they do not know how to act. Anything which is done to overcome
this uncertainty, this genuine ignorance on how to move, would
certainly be welcome. Again, it should be viewed not as the be-all
and end-all, but just as another compromise which could be useful
to overcome the present stagnant situation and could probably
be changed once the recovery is on board and we do not need any
more fiscal stimulus.
Lord Marlesford
202. I should like to ask you, if I may, about
the national perception of responsibility for the health of the
economy? I am thinking of health in several ways, inflation, unemployment/growth,
maybe stock markets and I am thinking of perception in terms of
the financial community, the investing community, business people
and ultimately the man in the street. In the US it seems to me
that the Fed is seeing quite a lot of those groups as having a
very prime and immediate responsibility and the government, the
Fed, in the meanwhile, although ultimately the President will
win or lose according to the health of the economy, has a very
primary responsibility. In Britain it is seen much more at all
levels as the responsibility of the government and the MPC of
the Bank of England, for all its performance, is not seen as having
a direct responsibility. In the case of euroland, the ECB worked
very well when its responsibility was seen as inflation and there
was no inflation effectively for the first four years or so. Now
that there are major question marks over the fundamental health
for structural reasons, as you have been describing, of euroland
economies and particularly as shown by unemployment and lack of
growth, do you think that the pressures on the ECB will become
greater or do you think the people of Europe will feel their own
national governments are responsible or do you think the national
governments will say it is all the ECB and not our fault?
A. If I had to answer the question: who is viewed
by the markets in Europe as being the primary actor on the public
side in the financial markets? I would not have an answer. The
ECB is viewed as a very important actor, but with a very specific
remit: pursuing price stability within the promotion of the European
Union goals. The goals of the European Union are employment and
growth. The ECB is viewed as central to the financial markets
as the US Fed. Are national governments viewed as the other? In
this country, in the UK, it is certainly the case. Is it the case
in France or in Germany or in Italy? My personal perception is
that it is not. Governments have simply not been seen as traditionally
close to capital markets and financial markets and financial business
in general, as they have been seen in this country throughout
the centuries. Are the financial market players on the European
continent orphans without a public partner with whom to hold a
dialogue? To some extent the answer is yes. In some cases national
central banks still have this sort of role, are still viewed as
friendly partners with whom to compare views, notes. In some cases
national central banks still retain supervisory capacities over
the banking system. Whilst here you have the one regulator, the
FSA, in Italy for instance you have the Bank of Italy which supervises
the banking system. In Germany theoretically the two are separate,
but the Bundesbank and the supervisory authority are very close,
even though things are changing significantly in Germany in terms
of being much more separated. In France there is a commission,
which is separate from the Banque de France, but is very close
to it. To the extent that the supervisory capacity over the banking
system is either close or even retained by the national central
bank, this ends up performing the role of counterpart to the private
actors. Is this as present as it is here or in the United States?
No, I would not say that; I would not say that. It is a difficult
question to which to find an answer.
203. As things get worse—and I should
be interested to hear when you think they are going to get worse,
particularly in Germany, but also in France—somebody has
to carry the can. There are going to be demands for something
to happen and in my view the stability pact, if anything, is counterproductive.
There is a lacuna.
A. Yes, I think there is a lacuna. I agree with
this, but I think this lacuna can really only be filled through
history, through a gradual evolution rather than by an Act or
a new piece of legislation. For instance, if I ask myself why
the US Fed is so present in financial markets, one answer is that
the US Fed know not only the major banks very well, but almost
all the significant banks in the United States. They know their
CEOs, their chairmen, their board members. They have constant
dialogue both with the subjects they are meant to supervise, but
also the subjects they are not meant to supervise. For instance,
investment banks in the United States are not being supervised
by the Fed but by the SEC, but the dialogue with the Fed is nevertheless
on a daily basis. Most of them have their central headquarters
in walking distance from the Fed. How has this system developed?
It certainly did not develop through a piece of legislation or
an act of government, it just gradually developed by mutual interest.
There is nothing to prevent the ECB from becoming such a centre
of communication and quite possibly it is only a matter of time,
but time is needed.
Chairman
204. Could I just move you on to the voting
structure, the new system which has been accepted by the council,
as I understand it, about how the voting system should work after
the enlargement of the ECB? Your house magazine, which is an excellent
one, suggests that this is probably about as good as you can get,
but I have to say a lot of our other witnesses are actually extremely
critical of this and say it will not work. What is your view?
A. I think it is just too early to say whether
it will work or not. The first question is: how different is it
from the present one? If we assume the present one works and I
think it did work overall because we did not hear of any major
disasters, the present one has 18 votes, the future one will have
21. The executive board will have a permanent voting right which
it basically has now. The main difference between the present
one and the future one is that some members will rotate with different
frequency geared according to size and importance of the financial
markets of the countries concerned.
205. Excuse me. There is another difference,
as I understand it, that non-voting members will be present and
will be able to speak.
A. Yes, they will be able to speak.
206. There will be a lot more of them.
A. Yes. This is the important difference. Will
they be naturally restrained or not? We will have to see how that
works in practice. Would it have been wiser to prevent them from
attending? Possibly; it certainly would have been more effective.
If we are to pursue the effectiveness route, then even 21 votes
are just too many. Ideally one should have chosen this opportunity
of changing the Treaty to change the whole system towards much
more restricted voting, possibly like the US Fed, which has 12
voting members; six of them are the Fed board and then there is
the chairman of the New York Fed. Basically there are four rotating
members and they are the chairmen of the regional feds and they
rotate on a yearly basis. It is a body of 12 voting members. That
works. So 21 may be too many. The next question is one which in
a sense goes back to the root of this process. Evidently it was
judged by the governors of the governing council that there was
no political support for being bolder by moving towards a narrower
set of voting members. The question is: were they the right ones
to take such judgments? That is a good question to ask. Should
it not have been for the European Council to express such a political
judgment? Even though I cannot answer whether this works or not,
I certainly see something unnatural in the way this process has
been managed.
Lord Marlesford
207. May I go back to something I think you
said in an earlier reply, which was that what would be nice would
be for euroland to move forward on the basis of best practice
in different areas and that the best practices were introduced.
I think this is relevant to the structure of the ECB particularly.
Is not one of the problems of doing this, one of the obstacles,
the differences in political culture which reflect these things?
Take, perhaps a silly example but one totally away from the economics,
the fact that bullfighting does not appear to be a major political
issue in Spain, whereas fox hunting is a major political issue
in Britain. Some of the structural problems which these countries
have never seem to be solved. Do you think that the ECB has any
role in trying to persuade the domestic electorates? Take for
example capital taxation in France, which seems to be exercising
an increasingly disincentive effective and deterrent effect towards
people staying in France.
A. Certainly the ECB could have such a role.
They have put in a significant effort, especially the executive
board members, to communicate, both within their own countries
and some of them across frontiers, in favour of a more unified
approach to financial legislation. At the same time, the ECB has
to keep itself within its own remit. On the whole the ECB as a
concept enjoys great support amongst the public opinion in Europe,
but if it were systematically to overstep its remit, its mandate,
this support would wane. For instance, if the ECB were to advise
countries on capital taxation, there is a case where that could
be useful. Their view there, in saying that formal taxation is
unhelpful in creating a unified capital market, would be respected.
We are at the borderline; you would be at the borderline. I understand
the cautiousness of the ECB board members in dealing with these
issues, because once they were viewed as intervening on the national
governments' turf, they would quickly lose support. In some cases
this task is left to the national central bank governors. Very
often the national central bank governors have more leeway to
criticise or to invite their own national governments to change
their policy behaviours. Then the issue, the question, is whether
the national central bank governors are immune from these cultural
peculiarities such as bullfighting. I would not know how to answer
that; certainly not 100 per cent of them are immune.
Lord Hannay of Chiswick
208. Following on from several of the things
you have said, do you feel, as some of our interlocutors have,
that what the ECB lacks is a body with which it can conduct a
dialogue about economic policy? That follows your point of view
that it should not be laying down the law about the economic policy
because that is not in its remit, but it lacks the kind of dialogue
which the chairman of the Fed has with the Secretary of the Treasury
and it also, to some extent, lacks the kind of dialogue that the
chairman of the Fed has with Congress, but that is a different
point. I just wondered whether you had any thoughts, first of
all about whether there is a vacuum there on the economic governance
and co-ordination side and secondly whether there is any prospect
of it being filled by the ideas which are going around for the
eurogroup to operate as a more cohesive, though I am not suggesting
a body which takes formal decisions on tax policy or anything
like that, but a more cohesive interlocutor for the ECB? Would
that strengthen the overall system in your view?
A. I think it would. Let me just say a few words
about the word "dialogue". The word "dialogue"
is a word, at least when I was in government, that the ECB and
any central banker hate, because dialogue means to give in. The
dialogue, especially with a finance minister, usually ends up
in a shambles. Either he is angry because the central banker has
not done what he wanted him to do, or the central banker does
what he is asked to do and then is being viewed as not independent.
At the same time, everybody, both central bankers and finance
ministers and everybody, understand that to talk to each other
is certainly better than not to talk to each other. This sort
of tension has been going on since the very beginning. In European
policy making there is a periodic gathering in the eurogroup.
Once a month the head of the central bank, of the ECB, or his
deputy, attends the meeting of the eurogroup and can express his
views and maybe ask questions. I go back to what I said at the
beginning: with increasing self-confidence this dialogue becomes
more and more natural. At the very beginning the strong tradition
of the independence of the Bundesbank and the naturally strong
suspicion that central bankers have towards finance ministers
prevailed and at some point the ECB was very reluctant to attend
these meetings and remained silent. At the same time the eurogroup
ministers were very open, sometimes too much so, in asking for
changes of this interest rate or that exchange rate. Since this
initial period, there have been discussions on rather practical
terms on how to share responsibilities, what the parameters are
of a civilised dialogue between the two. My sense is that with
increasing self-confidence central bankers can now interact with
finance ministers without the fear of being viewed as less than
independent and without necessarily causing anger amidst their
political counterparts. So the answer is yes, there is a great
benefit in this dialogue, but at the same time both parties should
be relatively sure that this dialogue is not overstepping its
remit because the outcome is certainly bad. If this dialogue is
not successful, what markets review are two different parties,
the central bankers and the politicians. They would both speak
with different voices and they would send different signals to
financial markets and there is nothing worse for financial markets
than confusion. Usually responsible people try to avoid this,
so I think self-confidence and common responsibility will help
to produce a successful dialogue.
Chairman
209. I should like to thank you very much for
the extremely lucid and clear way in which you have answered our
questions. You have been extremely helpful to us. Thank you.
A. Thank you again for this invitation. As I
said at the beginning, I am very honoured to be here.
|
