Reports. Alice in Euroland

Citation

(1999), "Reports. Alice in Euroland", European Business Review, Vol. 99 No. 6. https://doi.org/10.1108/ebr.1999.05499fab.007

Reports. Alice in Euroland

Reports

Alice in Euroland

Summary of Professor Willen Buiter's paper to the Centre for Economic Policy Research

The legal framework, institutional arrangements and emerging operating practices of the ECB/ESCB are flawed and in urgent need of modification. At the very least, the ECB's deficiencies pose a threat to its continued operational independence. Beyond that, they could put the common currency's survival at risk. A threat to the common currency is a threat to the entire EMU edifice and to the continued success of the post-Second World War European integration process.

Change will have to come quickly to the ECB. Some of the necessary changes are constitutional in nature and require amendments to the Maastricht Treaty. This is a difficult, cumbersome and slow process. Among the constitutional changes I propose are the following:

1. 1.

   Abolish the "one-country-one-seat-on-the-Governing-Council" rule; restrict the size of the Governing Council to no more than nine members and the size of the Executive Board to no more than four members.

2. 2.

   Abolish the clause in Article 109 giving the Council of Ministers the power to formulate "general orientations" for exchange rate policy. This clause creates doubts about the substantive domain of operational independence of the ECB.

3. 3.

   Charge the ECB explicitly with responsibility for systemic financial stability in Euroland. The words "lender of last resort" should be used in the revised Treaty.

4. 4.

   Create a body that has the power to vet and make binding recommendations about the procedures used by the ECB. One possibility is that this supervisory body would consist of MEPs and members of the European Court of Justice.

Other necessary changes can be made overnight, at the discretion of the Governing Council itself. They include the following:

1. 1.

   Publish the minutes of the meetings of the Governing Council and of its relevant committees and sub-committees.

2. 2.

   Publish the individual voting records of Governing Council members.

3. 3.

   Publish the inflation forecast.

4. 4.

   Clarify the operational inflation target.

5. 5.

   Abandon attempts to create a culture of "collective responsibility". Presenting a spurious united front to the outside world adds to uncertainty about the likely future stance of monetary policy among market participants and the public at large. It also would slow down the Governing Council's ascent of the learning curve.

A third category of changes does not require Treaty amendments, but cannot be implemented at the sole discretion of the Governing Council either. These include the following:

1. 1.

   Strive for institutional arrangements and practices that make for better co-ordination of monetary and budgetary policy in Euroland.

2. 2.

   Flesh out the lender of last resort function of the ECB. Note that this does not have to wait until the Treaty is changed. While formal recognition, in an amended Treaty, of the ECB's systemic financial stability role and lender of last resort function would be helpful, the existing Treaty does not proscribe such a role and function. The ECB should just get on with it.

3. 3.

   Spread the message that authority in the ECB/ESCB is centralised. National Central Banks (NCBs) are useful conduits for national information. Independent NCB research departments provide useful safeguards against intellectual "democratic centralism". Beyond that they have no essential function and certainly no substantive authority. The Treaty is clear on this, but not all NCB governors appear to have read or understood the relevant passages. This creates unnecessary uncertainty in the markets and among the public at large.

4. 4.

   Evolve a European Parliament with teeth. It does no good either for the European Parliament or for the ECB to have the President of the ECB walk all over the MEPs.

It is my hope and expectation, that the ECB/ESCB will change along the lines indicated above, and that EMU will succeed in generating greater Euroland-wide prosperity than would have been likely under any alternative monetary arrangement.