Preparing the ECB for enlargement

Paper abstract:

Number six in the Policy Paper series from the Centre for Economic Policy Research (CEPR), the series aims to provide a forum for the analysis of important policy issues by leading researchers. This paper reflects on the enlargement of the EU and the challenge this presents to the European Central Bank (ECB) and argues that, as a matter of urgent concern, the ECB and/or the European Commission should formulate a response to this challenge.

The authors argue that, in the foreseeable future, Euroland's interest-setting body will increase from its current 18 members to 30 or more. This poses a considerable problem for efficient decision-making. It is argued that this situation is a serious threat to the smooth running of European Monetary Policy with the additional members turning the Council into a 'big, unwieldy group' and opening the door to many problems.

The authors assert that EU leaders must demonstrate that they are both aware of this problem and capable of instituting a process that will solve it. They acknowledge that a first step has been taken with EU leaders at the Nice summit recognising that it is a precondition for enlargement. Article 5 of the Nice Treaty allows the EU to modify the ECB's decision-making procedures without convening a new intergovernmental conference (IGC). However, the paper argues that the next step has not yet been taken and that it would be a mistake to wait to reform the ECB until after the ratification of the Nice Treaty by all parliaments.

The paper presents a seven step argument starting with the background and discussion of enlargement, how EMU newcomers will differ from current members, and studying how the ECB's interest-setting body, the Governing Council would function with 30 or so members. Next, options are presented for reforming the Governing Council's decision-making rules, focusing on rotation, representation and delegation moving on to point out the shortcomings of rotation and representation. Following this, a recommendation is described and finally, modalities are discussed.

This paper will be essential reading for economists, politicians and academics in particular who are interested in European Monetary Union and the European Central Bank enlargement issue in particular.