Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 210-219)




  210. Welcome, Financial Secretary. Would you like to introduce your team?

  (Ruth Kelly) I think it would be easier if they introduced themselves.
  (Mr Woods) I am Robert Woods, Head of the Fiscal and Macroeconomic Policy Team.
  (Ms Owen) Sue Owen. I am Head of the Directorate that deals with EMU policy, Euro Preparations, and I am now Deputy on the Economic and Financial Committee.

  211. Thank you. Is there anything you would like to say at this point?
  (Ruth Kelly) No, I am quite happy to get stuck in, my Lord Chairman.

  212. As you know, we have been doing this investigation and we want to produce a report on the progress of the European Central Bank. As I understand it, the Chancellor told the House of Commons that the Government would continue to seek reform of the ECB, but he did not actually say what reforms he was seeking. I would be grateful if you would try and elucidate the Chancellor's remarks.
  (Ruth Kelly) I think the key thing to recognise here is that monetary policy and the way monetary policy works is an evolving process. Indeed, when we looked at different monetary policy frameworks as part of our work on the five tests, one of the papers we produced alongside the assessment was a paper looking at the Federal Reserve and the operation of the Federal Reserve since its inception. The key lesson that emerged from that was that the Fed had evolved over time. I do not think what the Chancellor is saying is to look at the ECB and say, "That's not right, something needs to be fixed". It is a question of recognising that the ECB should evolve over time, should seek best practice in all areas, and of course to look to see what other models exist, and to have an influence to the debate and to seek a great debate about how the most appropriate monetary policy framework could operate.

  213. Presumably the Chancellor has a certain idea of his own in mind when looking at these other systems?
  (Ruth Kelly) Yes and no. I think we have to recognise, and it is absolutely right to recognise, that the ECB comes from a completely different tradition from the Bank of England, for instance. It imports a lot of its credibility because it is modelled on the Bundesbank constitution, and that is a completely reasonable way for the ECB to have developed. The Bank of England, when it was made independent, had an extremely different task. It did not have the credibility of the Bundesbank then as an example. It had different questions of legitimacy. It could, as it were, start from scratch. We could think about how to use the institution as a mechanism of establishing credibility. We have pursued different routes. However, our contribution to this debate is, firstly, as an exemplar. The Bank of England as it operates in practice influences the debate by its nature—the fact that it is there and it is different. Secondly, we seek to influence the debate by publishing extensively the academic literature on central bank independence and so forth; and, of course, we contribute to the debate in other ways. What we want to do always is to go right back, as it were, to first principles and say, "How can we have a system which maximises credibility, which is legitimate and accountable and as transparent as possible?", while recognising that there are very different traditions in which they operate. Rather than seeking specific reforms, I think it is a general approach that we want to deepen and develop the debate. To its credit, I think the ECB also shares that view and is interested in the ongoing policy debate, for instance, about whether the inflation target should be symmetric; whether the medium-term should be defining some of the questions your Committee has been looking at; how the fiscal policy coordination works in practice; and how accountability and predictability of decision-making can be increased. All of these areas are ones on which academics have published and are ones we are seeking to explore to deepen the debate.

Lord Taverne

  214. Would you agree with the view that in practice there is very little difference in the way central banks operate, and the only differences were rhetorical?
  (Ruth Kelly) If you take the Bank of England and the ECB, despite their very different cultures and traditions, they have probably both operated in a fairly appropriate manner over the past number of years. They have stabilised output more than in previous times of economic weakness; they have maintained low inflation throughout the period; and they seek through maintaining price stability to underpin the economic policies—in the case of the UK the UK Government, and in the case of the ECB of the Euro Zone. I think it is probably fair to say that the Fed operates in a fairly similar manner, despite the fact that it is constitutionally set up in quite a different respect. Yes, I would agree that, in practice, they have operated in fairly similar ways, although obviously the manner in which that is expressed has differed.
  (Ms Owen) One other thing to add there is, the ECB in some ways does have a much more challenging and difficult task from the Bank of England because it is dealing with the euro-area which is made up of many different countries. If you think of the issue of how you coordinate fiscal and monetary policy, in the UK that is rather easier as a Treasury observer at the Monetary Policy Committee and with a lot of exchange of information. In the case of the euro-area the ECB do attend the sort of meetings I attend, which are meetings of the fiscal bodies; and the fiscal authorities have some way of being represented at ECB meetings—the Commission go and the Chair of the Eurogroup may also go. Whilst there are a lot of similarities, there are some differences which are more challenging.

Lord Hannay of Chiswick

  215. May I ask two questions—the first arises from your answer. I welcome very much what you say about this being an evolutionary process, and what we are looking for is an evolutionary, evolving European Central Bank. Would you not agree that to talk about our wanting to see reform of the Central Bank is potentially rather misleading, frankly, in that context? I would not be so crude as to ask you what date you think we might become a member of the European Central Bank, that is unknown, but if what we are asking for is that the Central Bank evolve, and it is already evolving, then potentially it is misleading to say we want it to be reformed, because many terrible things are done in the name of the word "reform", and many good ones. I think it is misleading. Secondly, and this is more of a substantive question, the InterGovernmental Conference has now opened and it is considering all the institutions of the European Union. We were told, in testimony that was given to us, about the way the Central Bank had come up with a solution to enlargement (which could perhaps be politely described as a bit "counterintuitive"), that they were forced into this solution because the terms of the Nice Treaty, which gave them and the Member States the ability to make changes, circumscribed that ability very tightly and did not allow them to think more widely or more laterally of solutions which might have been better, like a Monetary Policy Committee with a governing council that was the oversight body of the Monetary Policy Committee, and the Monetary Policy Committee would be much less onerous etc. They said that this had been outwith their possibilities because the Nice Treaty did not delegate that power to the Ecofin Council, the Eurogroup or the ECB. My question is: what thought is being given, in the IGC context, to somewhat enlarging the scope for reform of that particular institution, the ECB, in the future—given that I suppose many people hope that the constitutional agreement will last for a considerable time without amendment, and that it is very cumbersome indeed to get 25 ratifications just because you want to change somewhat the way the ECB works. Could you say whether the Government is giving any thought to using the IGC in a constructive way? I recognise not being a member of the single currency puts us in a slightly difficult position, but I would have thought there could be some general desire to make use of this occasion to build in some more potential flexibility?
  (Ruth Kelly) Just on your first point, about whether or not it is misleading to talk about reform of the ECB, not at all. I think the Chancellor has been really explicit in saying that this is not a sixth test as to whether we join in or not. In our general work on policy frameworks we are deeply engaged in looking at Central Bank independence and debates around that. Of course, we seek to continually improve our understanding of those areas; and, by doing so, will clearly influence others in a European context as well. On the point about the IGC, in all of this, I really should have said at the outset, it is not for us to lecture the ECB about how they run their affairs. As you rightly point out, we are not members of EMU at the moment and we have to be sensitive to that fact. We influence the debate in other ways—of course, through dialogue, but also just by having a very well functioning model in the UK, and by engaging in an academic debate and publishing academic literature on these subjects. You talk about the ECB governing council and how it is modelled and what it will look like following enlargement and so forth—again, we have to be quite careful about our relationship with this dialogue because we are not members of EMU.


  216. You have supported the current solution, despite the fact that it could be pretty cumbersome?
  (Ruth Kelly) What we have said is that it is satisfactory from our point of view. We do understand that it is probably the case that the Fins are likely to raise in the IGC the possibility of an enabling clause being inserted, which would allow members to revisit how the board is comprised in future without having to amend the Treaty and going through the whole process all over again. Our attitude to that as a government is, "Let's wait and see what is actually proposed, and we'll look at anything on its merits". Of course, we are open to dialogue on areas just such as this.

Lord Sheldon

  217. You mentioned that the Bank of England and ECB have reached their position by different routes, and we understand that. One of the big differences is that the Chancellor of the Exchequer did set the limits, so there was some outside accountability. It is that absence of outside accountability that does concern me. They decide the issues and then implement them. Should the same body be able to do both: decide the issues and administer them without any outside involvement? Your colleague mentioned that the fiscal authorities have some way of being represented, but is that really enough? Particularly as there are going to be 25, with this kind of to-ing and fro-ing, is that proper accountability or is it just ideas that can come from anywhere? What bothers me is what is the body that could produce this outside influence that perhaps has rather more significance than anything we have seen so far?
  (Ruth Kelly) You are absolutely right to point to the fact that we come from very, very different traditions. I think that, by and large, explains the difference in approach between the Bank of England and the way the ECB was set up and constituted. I think it was almost inevitable for reasons of legitimacy and acceptability, particularly in Germany, that price stability was embedded in the constitution of the ECB in a manner very similar to that of the Bundesbank. Over time the ECB has shown a willingness to evolve; has clarified its objectives; has clearly shown a willingness to listen to the academic debate, both when it comes to defining an inflation target, being sensitive to risks of deflation, and showing how it is going to operate over the medium-term; and becoming more forward-looking for instance. I think that is very encouraging. What is very important in a situation where that independence of target-setting is embedded in the constitution is that there should be very clear mechanisms for communicating between the monetary and fiscal authorities. If there is one area where we really see a need for improvement it is in that debate.


  218. You are talking about the inflation target?
  (Ruth Kelly) I am talking about the debate between the ECB and the fiscal authorities in Europe. It is very simple in the UK, relatively speaking, because we have one MPC; we have the Government; the Government sets its own policy objectives and it sets the inflation target; and there is a completely shared understanding of objectives. The Treasury representative sits on the MPC Board as a non-voting member, an observer, and he explains the Government's approach to fiscal strategy and can report back so that fiscal authorities really understand what the monetary policy reaction will be to a change in fiscal stance and so forth. It becomes a much more predictable process. Particularly when you do not necessarily have the relative simplicity that we have in the UK. With the more complex environment in Europe the communication between monetary policy and fiscal policy becomes even more important. There are mechanisms for that to happen at a European level, but the ECB has guarded its independence very, very closely. There is an argument which says they should be much more forthcoming about the future direction of monetary policy and how they interpret the fiscal authorities' reactions, stances and so forth; and that you would thereby produce a better monetary/fiscal policy mix. I think that is a very important area. In some senses I think you could say that the Member States have been so preoccupied with the Stability and Growth Pact and so forth that in a way this debate is one that has yet still to happen, but I am sure that it will happen over time.

Lord Sheldon

  219. You said the mechanisms for communication and co-ordination between fiscal and monetary policy are not in place in some sort of way. I did not quite understand that.
  (Ruth Kelly) The President of the Council attends ECB meetings, as far as I understand. ECB representatives come and debate with Member States. The ECB traditionally has viewed its role as listening rather than engaging, I think it would be fair to say.

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2003