Toothless watchdog of the ECB

Date: 02/04/1998

Tim Jones reports from behind the last line of defence against an all-powerful and unaccountable European Central Bank.

EUROPEAN leaders are within three months of creating the most powerful single monetary authority in the world.

The Frankfurt-based European Central Bank will be independent to a degree which the famously autonomous German Bundesbank or US Federal Reserve can only dream of.

Politicians will be expressly forbidden from seeking to influence the ECB, its board and its constituent national central banks. The six members of the bank's directorate, including the president and vice-president, will serve terms of up to eight years and can only be removed by their peers via an order of the European Court of Justice.

In the past, when national central banks were given their independence, governments and parliaments established how they should conduct their policies. The lucky bankers at the ECB will be able to decide among themselves how openly they want to run policy.

It is almost certain that the governing board's deliberations over monetary conditions and inflationary pressures, as well as breakdowns of how members voted on interest rate increases, will be kept secret.

European citizens and investors in the financial markets - often the same people - will soon be crying out for a body to watch the ECB like a hawk, remove its cloak of secrecy and make it accountable.

The good news is that there is such a body: the European Parliament's monetary subcommittee. The bad news is that it is nowhere near ready to fulfil this historic role.

Committee members will howl with protest. It is true that since the subcommittee was founded in April 1993, it has managed to pull in top names. European Monetary Institute (EMI) President Wim Duisenberg himself attends at least twice a year, as did his predecessor Alexandre Lamfalussy.

Every national central bank governor has spoken to the group and it is the only forum where Nigel Wicks, the president of the powerful but furtive monetary committee, can be held to account.

More importantly, under the Maastricht Treaty, the ECB president and other members of the executive board 'may', at their own request or at that of the Parliament, be heard by this committee and nowhere else.

But this panel, which is destined to become the face of the Parliament to the television-watching public through such hearings, has a long way to go before it can fulfil its ambition of emulating the US Senate banking committee.

When Federal Reserve chairman Alan Greenspan appeared before the banking committee in February to give one of his semi-annual 'Humphrey-Hawkins' reports on monetary policy, he knew he would face a detailed grilling from the 18 senators on the panel.

They sit in a row on a dais and Greenspan sits in front of them as though he was facing a judicial inquiry. The hearing begins in a formal manner, with a statement from committee chairman Alfonse d'Amato, followed by other members in order of seniority and alternating between the parties.

Then the cut-and-thrust of questioning begins, and few holds are barred. In 1991, Greenspan's appearance before the committee at the depth of a recession prompted D'Amato to demand: “What inflation are you worried about? People are going to starve out there and you are worried about inflation!”

Questions to Greenspan can often be met by stone-walling, but the senators can come back at him again and again. The committee has its own staff economists with access to the latest information from the Fed, international forecasting organisations and the White House.

When Duisenberg appeared before the Parliament's monetary subcommittee last week to present the EMI's report on European economies' readiness for monetary union, the experience was wholly different.

The meeting took place in a cavernous committee room in the new billion-ecu Léopold complex. Duisenberg sat on a podium next to German Socialist MEP Christa Randzio-Plath, the subcommittee president, and five others. The members sat below, looking up. Duisenberg made a statement which departed in no way from a speech he had made in Frankfurt a day earlier and then the questioning began.

Randzio-Plath called German Christian Democrat MEP Karl von Wogau, who made a statement and then put a series of questions. Instead of asking Duisenberg to reply, she then called British Socialist Lyndon Harrison, followed by Belgian Christian Democrat Fernand Herman.

Over ten minutes, the three asked how public debt reduction could be enforced under EMU; how ECB independence would be reconciled with accountability; how long a currency should be within the Exchange Rate Mechanism before joining EMU; what the Asian crisis would do to European growth; and how worrying current inflation was.

“I will be happy to answer most of the questions,” said Duisenberg when they had finished. A similar comment would have seen Greenspan ripped to shreds. Duisenberg then ran through his notes, bunched answers together and avoided the questions he did not like.

Another round of three questions followed, and so it went on until 20 MEPs had had their say.

At the beginning of round three, Duisenberg stopped even attempting to give precise answers, as nobody was going to come back at him with a follow-up question.

Committee members defend the way the hearings are run. “At a lot of those meetings, particularly the one with Nigel Wicks, there was a reasonable to-and-fro,” said Lyndon Harrison. “We are multinational and multi-group and that can stand in the way of free flow. We are trying to slim down the number of people who intervene and confine it to those who have some expertise in certain areas.”

However, the subcommittee's problems run deeper, according to staff. It was created to bring some focus to scrutiny of monetary policy and slim down the amount of work done by its parent panel, the committee on economic and monetary affairs and industrial policy.

But its resources do not match up to its mandate. It employs two professional economists and a former commercial banker, attempting to oversee the economic policy staff of the European Commission, the EMI, national central banks and soon, the ECB itself.

They are meant to provide detailed support and alternative views to Euro MPs, but are nearly always left out of the loop by these decision-making institutions. They are usually forced to rely on their own background knowledge, newspapers and word of mouth for their information.

“Only when we can be on a par with the ECB can we be as well-informed as they are and really get everything we need out of them,” said Alman Metten, a Dutch Socialist subcommittee member.

Fortunately for the group, the London-based Centre for Economic Policy Research, a highly respected think-tank, has formed a team of monetary economists to shadow the work of the ECB for MEPs.

But the subcommittee requires far more deep-seated reform, say insiders. They feel it needs to set up a unit with its own econometric model to compare forecasts and policy prescriptions with those of the ECB and the Commission.

It should get an agreement from these two, as well as Council of Ministers' bodies such as the monetary committee and the economic policy committee, to allow an 'observer' economist into their deliberations.

Such reforms would certainly be resisted, but someone has to make sure that the growing number of civil servants' committees which are running EU economic and monetary policy are brought into the light. It may as well be the Parliament's 'competent' body.