First salvo in battle for euro-zone control

Date: 27/07/00

French Finance Minister Laurent Fabius has sparked a furore by suggesting that governments should consider setting an inflation target for the European Central Bank. But is all the fuss justified? Tim Jones reports

ONLY political innocents can have been shocked by France's recent 'attack' on the European Central Bank's unparalleled independence.

After all, the whole point of the euro in French eyes was to tame the over-bearing presence of the German Bundesbank. That it has done.

The greater shock was felt in Paris, where the men in suits wandering around the upper floors of the finance ministry's riverside Bercy headquarters have yet to grasp the news values of 'la presse britannique'.

When Finance Minister Laurent Fabius admitted to a European Parliament committee that the issue of whether governments should set an inflation target for the ECB was "the sort of question we should ask", his officials felt sure he was debating a fine point of theory with a group of like-minded policy experts.

So when the headline 'Paris minister hints at control over ECB target' appeared in the next day's Financial Times, they were puzzled. This quickly turned to fury when Bundesbank President Ernst Welteke felt the need to react to the story, quashing Fabius' suggestion as "superfluous" and adding: "The independence of the ECB is clearly defined in the EU's Maastricht and Amsterdam treaties; they refer to the choice of monetary policy strategy."

Within days, Fabius had run for cover, saying: "I know the treaties perfectly well; I know what the powers of the different institutions are and there is no intention of modifying these competences." Not now, anyway.

This was embarrassing for Fabius, but not the end of the story. He wants to 'rebalance' the euro zone's institutional powers agreed nearly ten years ago in Maastricht. France's late President François Mitterrand might have swallowed whatever the Germans served him in Maastricht, but that does not mean that the French left had to like it or even stick to it as time went on.

The man who left the French prime minister's office in 1986 likes to think he would not have made the ECB a law unto itself during the negotiations on setting up economic and monetary union in 1988-91. He is attracted to the British model, under which the finance minister sets an inflation target (a 'norm' of 2.5% in the UK) and the central bank can do what it likes to meet that goal.

There is both less and more to this public spat than meets the eye. Less because, as Welteke points out, the suggestion is interesting but superfluous given that the self-styled guardians of ECB independence - Germany and the Netherlands - will not agree to such a change. More because it underscores growing French self-confidence in the economic policy field.

A glance at the EU's consolidated treaties suggests that Welteke can sleep fairly easily in his bed, although the law is certainly not cut and dried.

Article 105 states that "the primary objective of the European System of Central Banks shall be to maintain price stability" and that one of the banks' "basic tasks" is to "define and implement the monetary policy of the Community". Article 108 adds that "neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a member state or from any other body".

And that is it. The ECB's right to set its own monetary policy targets is not to be found in the body of the treaty but in an attached protocol establishing a 'statute' for the bank. Article 12 states that the bank's governing council "shall formulate the monetary policy of the Community including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in the ESCB, and shall establish the necessary guidelines for their implementation".

But even this is probably safe. Sixteen articles of the protocol can be changed by a weighted majority vote of member states, but this does not include Article 12.

Independent target-setting is seen in Frankfurt as central to the bank's policy-making. When the Czech parliament voted last week to force the country's central bank to consult before setting an inflation target or changing the exchange-rate regime, the ECB was quick to warn that this was not "in compliance with the requirement of institutional independence" needed to get into the euro zone.

The ECB will not lie down. If Fabius is serious about wresting this target from Frankfurt's hands, his only hope is that he can achieve it with the ECB's consent.

This is not very likely. Even the practical consideration of setting a target between 12 governments should be considered.

So why make the fuss at all? Among the usual knee-jerk comments emanating from the popular German, British and Dutch press is the notion that Fabius wants a rule-change to allow France to pursue a traditional inflationary policy. Only Austin Powers would think a healthy dose of extra inflation is just what the French ordered. Mitterrand and his then Finance Minister Jacques Delors abandoned the Keynesian approach in the early Eighties.

Since the French statistics office introduced its latest series of consumer price inflation indicators 31 months ago, the index has risen by a mere 2.6%. In the previous nine-year series, prices rose by 18% or an average of 2% a year.

France long ago ceased to be an inflation-friendly economy and it is now benefiting more than any other euro-zone country from a virtuous cocktail of low inflation, a competitive currency and access to a huge single market.

Growth, which is expected to be 3.5% this year, is likely to exceed 3% again in 2001, while unemployment is dipping below the psychological threshold of 2 million. The latest figures show that a growth-generated windfall of €7.8 billion is coming into the public coffers this year, with a potential extra €20 billion (13 times the original expectation) flooding in from the sale of four licences to build and operate third-generation mobile phone networks.

For once, the French political class has no economic benefits to exact from its policy. This time, its objections boil down to good, old-fashioned ideological differences over who should run economies: unelected central bank officials or unelected finance ministry officials via their ministers.

The inflation-targetting skirmish aside, Fabius is making slow but significant progress in bolstering the political arm of EMU.

At the first EU finance ministers' meeting under his chairmanship, he won agreement to rechristen the Euro-12 coordinating group and expanded its remit to cover surveillance of labour, product and services markets reform, tax and wages. A compliant Pedro Solbes, the European Commissioner for economic affairs who has effectively become an official for the Euro-12, has also agreed to provide new 12-nation leading indicators.

The Euro Group will meet before every 15-strong Ecofin and will in no time at all usurp it, as journalists come to the end-of-meeting press conferences and then leave, together with most of the ministers. There will be plenty of desk space for the British, Swedish and Danish press. "In the next six months, we will talk a lot about political union and rightly so," said Fabius this week. "Political union is inseparable from economic union. Stronger growth and European integration are related issues. In both areas we will take concrete steps forward."

Inflation targetting can wait.

Major feature. French Finance Minister Laurent Fabius has sparked a furore by suggesting that governments should consider setting an inflation target for the European Central Bank. But is all the fuss justified?