Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 220-235)




  220. It is not the President of the Council, is it?
  (Ms Owen) There is a lot more traffic of the ECB attending meetings of the fiscal authorities. They can attend Ecofin. They come to all the official level meetings I go to—the Economic and Financial Committee. When it comes to the fiscal authorities attending the ECB meetings that is provided for—that the President of the Eurogroup (the head of the "ins") will go; and in cases where the presidency of the EU is held by an [odq]out[cdq] country, as happened recently with the Danes, then it would be the next "ins" presidency that attended—in that case the Greeks. The chair of the Eurogroup can attend the ECB meetings, and the Commission can attend ECB meetings as well. In practice that has not worked very well, and the Eurogroup have not always attended all the meetings of the governing council. There has been some suggestion in academic circles that that should be more formalised, and that they should be required to attend ECB meetings rather than have it optional at the moment. I think it would be fair to say that we would probably support making it compulsory. The other thing which does not work very well, on that fiscal monetary coordination, is in terms of reporting back from the people who attend the ECB meetings to the meetings of the fiscal authorities. There is not a regular slot where they report back on what happened at those meetings, that debriefing.

Lord Hannay of Chiswick

  221. You would therefore contemplate with reasonable equanimity that this increased dialogue between the monetary authorities and fiscal authorities (which will inevitably be with the Eurogroup) will inevitably be a dialogue from which we will be excluded?
  (Ruth Kelly) No, I do not inevitably concede that at all. I think it is very important there is continuous dialogue. Obviously the Eurogroup have particular interest in making sure that happens; but we all have an interest as well in making sure the fiscal stance across Europe is optimal; which is why there has been so much debate about the Stability and Growth Pact. That is one aspect of the debate. The other aspect of the debate is monetary/fiscal coordination.
  (Mr Woods) To the extent that these meetings are prepared in the Economic and Financial Committee, the UK is represented there, so we are party to those discussions.

Lord Marlesford

  222. Financial Secretary, if I could ask you a little bit about the performance of the ECB in terms of economic management of Euroland. Given that the Euroland economic performance is pretty appalling measured by growth, inflation and unemployment, with Germany in its third year of stagnation, and unemployment in France approaching ten per cent, first of all, do you think that the ECB has provided sufficient liquidity to guard against deflation? Secondly, do you think the ECB is right to say that the problems of unemployment in Europe are primarily structural, and that the answer is for the governments to go in for structural reform, and the Bank has very little role? The third point I would like to raise with you is on exchange rates. The ECB did intervene, apparently successfully, when the euro overdid the fall. Now with the continuing and probably gathering momentum of weakness of the dollar, the euro has become very highly valued in relation to the dollar, which of course is having a considerable impact and is likely to have a greater impact on the economy of Euroland. Do you think that the ECB can or should try and do anything about that in the way it did when the euro was undervalued?
  (Ruth Kelly) There are a number of points to make there. First of all, has the ECB pursued an optimal monetary policy? Our view is that monetary policy should try and achieve low and stable inflation over the medium-term. I think the track record of the ECB shows that is what happened. It has been around two per cent since its inception, despite a number of positive price shocks. Has it provided for a stabilising role? Has it managed to stabilise output and help support economic growth and employment at a time of weakness in the European economy? The research that we do and academics do using different models—and the one we often look at is something called the "Taylor Rule"—has shown that interest rates have led to more stable output than would otherwise have been the case over that time. They have tended to moderate any weakening of the European economy. Besides that, what else should the role of the ECB be? I think that is actually a huge challenge, both to achieve price stability over the medium-term and, through doing so, moderate any volatility of output. In itself that is sufficient definition, as it were, for the ECB. What should the Member States do about weakening growth is a different question. Our view would be very much that we need to concentrate across the European economy on structural reform. We have a very clear programme pursuing labour and capital market flexibility here in the UK. We want to see that pursued throughout Europe; and we published an economic reform White Paper to try and suggest just that. We want to see much more emphasis on entrepreneurship, research, development and innovation, all issues that were discussed at the Lisbon Summit and agreed between Member States a few years back. I think there are two slightly different roles that we see being played by the ECB and by Member States. Had the ECB done enough to combat deflation? Duisenberg has shown himself to be sensitive to concerns about deflation. I think that is probably one of the reasons why there has been more willingness on the part of the ECB to try and clarify what they mean by price stability. He has said in the past that he would be just as concerned about inflation going below one per cent as he would about inflation being over two per cent; which I think is a willingness to accept that there are additional concerns about deflation. There have also been further moves to clarify how they operate in practice which contributed to that as well.


  223. Although the ECB puts a lot of stress on not targeting inflation, de facto they are moving towards a symmetrical inflation target, do you agree?
  (Ruth Kelly) Up to a point I think that is true.

  224. That is basically, in a way, what Duisenberg was saying?
  (Ruth Kelly) That is, I think, what Duisenberg has been saying. The latest definition is just under two per cent, which suggests that it is a more symmetrical approach to inflation. Also in the Monetary Policy Review earlier this year the ECB explicitly downgraded their monetary analysis to the second pillar rather than the first pillar of monetary policy, and put much more emphasis on other economic developments than it had in the past. The ECB is showing itself very much to be a learning institution which takes on board the concerns of both academics and Member States.

Lord Marlesford

  225. The point on exchange rates and the successful intervention when the euro was falling—now what do we do about the euro?
  (Ruth Kelly) I think we are all agreed, Member States and the ECB, that it is not right to target the exchange rate; that you cannot have an exchange rate target alongside a price stability target. There are, however, occasions when you may want to intervene in the markets, and that is a judgment call—whether markets operate and whether, if you take an action, it will influence perceptions. I would not like to secondguess the ECB as it tries to evaluate the markets.
  (Ms Owen) Perhaps I could just add something on the first two questions. On the first question about the performance of the ECB, it is important to draw a distinction between their performance in targeting or achieving low inflation in the euro-area as a whole. There are lots of ways you can assess that. You can look at the actual inflation. In fact, in the last three years actual inflation has been somewhat above the range they have wanted. You can look at inflationary expectations, and those do seem to have stabilised well. You can look at what the Minister talked about with the Taylor rules, using the history of how monetary policy reacts, to assess whether their performance has been appropriate. There is beginning to be quite a bit of work there which suggests their policy stance has, if anything, been a little bit looser than it would have been had they adopted the Bundesbank's rules of operation. They have, therefore, been more alive to the risk of deflation than the Bundesbank rules might have been. I think the second part of your question was very much about what the challenge of EMU is in terms of the fact if you are looking at the euro-area average you are, by definition, not looking at any individual country. This is the challenge—that the monetary policy (except by accident) will never actually be right for any individual country. Indeed, one of the things we emphasise in the assessment in the chapter on flexibility is that inflation will be an adjustment mechanism; because when a country loses its own monetary policy and exchange rate it is looking to market mechanisms for the economy to stabilise itself. You will expect in the monetary union more variability in inflation than you would previously. The challenge is to make sure, while you are dealing with countries who will have higher inflation, you are also coping with the needs of the countries with lower inflation and growth. That is why we look in the monetary union to emphasise the importance of countries themselves adopting more market mechanisms to help them adjust, because monetary policy will not be helping them individually as much as it used to do. That is where the emphasis on structural reform comes from.

Lord St John of Bletso

  226. Financial Secretary, do you have a view as to who the lender of last resort should be in the Euro Zone? On the structure and governance of the Bank, if there were to be independent Monetary Policy Committees, should the non full-time executive members be independent experts, such as with the MPC, or rotating national governors from the Central Bank?
  (Ruth Kelly) On the question of the lender of last resort, we would like to see more clarity in the arrangements. To make it explicit, how and when liquidity is provided, I think would be an advance. On the question of the board of the ECB, there is a strand of academic literature which suggests that the way forward is through full-time experts. I think the risk of the current system is that you have a degree of regional bias in the decision-making body, with individual representatives of Member States veering towards a view more closely in line with what is appropriate in their own State, rather than taking a Euro-wide view. I would emphasise that in the Treaty they are absolutely mandated to take a broad view across the Euro Zone area. Nevertheless, the risk of regional bias or, indeed, the perception that there may be regional bias could persist. At some degree, the introduction of rotating Central Bank governors is an advance from that point of view. It is less likely that regional bias will creep in. Of course, there may be other ways of achieving the same end, and in future this may evolve further.

Lord Sharman

  227. Going back to your earlier remark that you would like to see the Bank of England being used as an exemplar, would you like to see the ECB publishing its minutes of the meetings of the governing council? Should they publish the results of votes of the council? Should individual positions be identified, or should it just be the balance of votes? How do you feel about those issues?
  (Ruth Kelly) It is not that I want to see the Bank of England as an exemplar—I think the mere fact that it exists and has an extremely good track record means that it is a different model people naturally look towards. When debates happen in Europe the UK is often asked its view without any politics entering into it. It is just natural to ask the UK about the development of monetary policy. There has been a study done recently, I believe, which ranked the transparency of six central banks, and the Bank of England came top and the ECB actually came next. The ECB is quite a transparent body. It does have regular press conferences. In the last few years it has started to publish forecasts and projections in its bulletins. The President of the ECB does appear in front of the European Parliament committees, and so forth. It is quite transparent, but has a slightly different way of achieving transparency from the Bank of England. We have just been talking about the possibility of regional bias, and there are pros and cons of publishing minutes, votes and individual positions. Some people would say it helps expose the arguments that take place in the EC governing council and therefore aid credibility, understanding, legitimacy and accountability of the ECB. Others will say that the risk of regional bias would increase if members of the governing board stay themselves accountable to their national governments, or national systems in some respects. There have been proposals for anonymously publishing the minutes without identifying individual members. We have found here in the UK that publishing the minutes is a very useful contribution to the debate. I do not want to say that in some respects the ECB is an untransparent body. It has slightly different ways of achieving a great deal of transparency in its actions.
  (Ms Owen) One of the things we did, and you probably read this in the policy frameworks EMU study, was to have a look at evidence of the extent to which the markets were surprised by decisions that the ECB and the Bank of England made. That showed, on balance, that the markets had correctly anticipated decisions. We inferred from that they felt they were getting enough information about the way the Bank worked at the moment. One other risk that some academics have highlighted if you were to publish votes, is that the real debate would start to happen in fora other than the general council. That is just a risk.


  228. It would be possible to publish minutes without votes, as the Minister was saying?
  (Ms Owen) Yes.

Lord Taverne

  229. You have mentioned several times that the task of the ECB is much more difficult than that of the Bank of England; it faces complex problems and these are going to get infinitely more complex after enlargement. I want to come back to the question of structure and the governance of the Central Bank after enlargement. There are proposals which have been made which are really a terrible dog's breakfast. There is a proposal which seems almost certain to lead to weak compromise and indecisiveness. What one wants is an input from all governments but surely we need an executive, a body selected on the basis of expertise, that can be decisive in its approach to these complex problems? Why on earth is HMG supporting a dog's breakfast? What on earth is the justification?
  (Ruth Kelly) We clearly need a body which is composed of experts. I think you can have that debate about whether national central bank governors are experts or not; but actually there must be an argument that they are. They do come from right across the Euro Zone and they are mandated to take a euro-wide view in the constitution. It is a totally valid point: could it be made better; and could it be made to work more efficiently? I do not think it is right to write-off the way it operates.

  230. Under proposals for enlargement it will make it much more difficult?
  (Ruth Kelly) In some respects the proposals for enlargement will improve the current situation because, as we talk about regional bias and people becoming entrenched in their positions in the ECB Board, there is a potential for that to weaken after enlargement given the rotating nature of representation. The proposals were also ones which would allow the UK to maintain a significant degree of input were we ever to be members of the euro. By and large, we are satisfied with them as an improvement on the current position, recognising the reality of enlargement. Of course, there may well be areas and ways in which this can improve in the future.
  (Ms Owen) I think the difficulty here is finding something better. You do have to balance the size of the group and the numbers voting with the legitimacy arguments. In the US in the Federal Reserve not everybody attending the meeting gets a vote. Of the 12 Regional Feds, the New York Fed always get a vote because of their importance in the financial sector; but of the remaining it does rotate. At the end of the day the ECB and the Federal Reserve do look to do things by consensus. Everybody will attend the meeting and be able to speak, so there is that safeguard there as well.


  231. Under the Treaty, the ECB of course, had to get complete unanimity in the Governing Council for any proposal it put forward. Although one could think of better ways of doing it, there was no other way which could have been agreed unanimously in the Governing Council.
  (Ruth Kelly) We have to recognise the realities under which the ECB operates.

Lord Marlesford

  232. One point on the draft constitution produced by the Convention. I understand there has been some concern by the ECB that there is no mention of price stability or non-inflationary growth. Is HMG arguing on the details in the draft constitution for changes relating to the ECB?
  (Ruth Kelly) It is not for us to tell the ECB how to operate at the moment. I think it is a pretty fundamental point. We can influence the debate indirectly, but we are not going to tell the ECB how to operate.

  233. I am sorry, you misunderstand me. The debate is on the constitution. The constitution covers everything, including the ECB. The role of HMG in the negotiation of the constitution is crucial.
  (Ruth Kelly) Absolutely. I take your point. We do accept that price stability ought to be part of it. We are happy to support that proposal.
  (Ms Owen) I think most Ecofin ministers have also supported the ECB in having price stability included as an objective.

  234. There is another point that concerns me. There is no reference to any desire for independence of National Central Banks. What is your position on that?
  (Ms Owen) We think that clarification would be helpful.

Lord Hannay of Chiswick

  235. Could I just go back to this business of the IGC and the price stability and so on. If I understood it rightly, the concern which has been expressed is not that the ECB will have in any way been weakened by what is or is not said in a constitutional agreement because, of course, one of the things a constitutional agreement does is to carry through the whole Maastricht structure into the new treaties. The ECB will not be affected one way or the other. The question is surely whether the European Union as a whole, involving countries which are in the ECB and EMU and those who are not in the ECB and EMU, should state that it is one of its objectives to achieve price stability etc etc. I imagine it is one of the objectives of the British Government to so state it, and there is only one way to make that quite clear and that is to have it in the constitutional agreement; not to have it in a bit of the constitutional agreement which refers to countries which do not include us at the moment?
  (Ruth Kelly) Yes, you are absolutely right, and we are supporting clarification of this.
  (Mr Woods) The price stability objective is in the 1998 Bank of England Act. This sets out the price stability objective.

  Chairman: I have to say, it has been extremely helpful to us. In quite a short time we have covered the whole of this bit of our waterfront, as it were. You have highlighted a number of points and you have answered a number of our questions. Thank you very much indeed. Exemplary witnesses!

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