Mr. Duisenberg discusses the comparisons between the structures and
methods of the European System of Central Banks and the US Federal Reserve System
Address held by the President of the Netherlands Bank and of the Bank for International
Settlements, Dr. W.F. Duisenberg, at the Spring Meeting of the Institute of International Finance
in Washington on 29/4/97.
1. Only twenty months to go before EMU takes off; before then, in the summer of
1998 at the latest, the ESCB will be established. The preparations for this turning-point in the
history of Europe are in full swing. Next year it will be decided which Member States are to be
in from the outset, a decision to be taken as you know by the Heads of Government on the basis
of the measure of sustained convergence achieved. Although the stability-oriented tradition
which has grown up over the years is to be continued within EMU, there will be a fundamental
change in the way monetary policy will be determined centrally. Here questions arise, such as:
how will the centre, i.e. the ECB, and the existing national central banks relate to each other in
such a context, and how can the skills and expertise of those national central banks best be used,
without impairing the single nature of monetary policy? It is these questions that I would like to
focus on today. As the ESCB will have a federal structure comparable to that of the Federal
Reserve System, it may be useful to take a look at the experience of the United States, all the
more so as the underlying economies will be comparable in size. In particular, what lessons can
Europe learn from this experience?
2. Let me emphasize a few points at the outset. On its own, monetary policy is
not equipped to counter an unfavourable macro-economic development. That calls for the
concerted employment of all available macro-economic policy instruments. In the American
situation, the Fed is expected to operate within the framework of the general economic
objectives set by the Administration. Coordination is facilitated by the centralized formulation
of monetary policy. In a monetary union such as the United States and the future EMU, policy
can only be pursued centrally. It is indivisible by its very nature, for one thing because of its
official interest rates, subjecting all regions making up the union to uniform financial conditions.
As to the question how monetary policy can best be conducted, there is no unequivocal answer.
That question relates to issues such as the economic variables on which policy should focus, or
in other words, the choice of intermediate objective. In some countries, Germany among them,
policy is targeted at a monetary aggregate, while in others a strategy of direct inflation targeting
is pursued. Alternatively, monetary authorities may focus on a range of economic indicators, as
is done in the United States. I will not go into the pros and cons of these methods here today. In
the European context, the EMI has concluded that in practice the differences between the various
policy strategies that could be pursued by the ESCB are not as large as in theory. A decision is
to be taken by the ECB on this point next year.
3. Looking at the structure of the Fed, we see three components, specifically the
Board of Governors, the regional reserve banks and the Federal Open Market Committee
(FOMC). The FOMC issues a periodic guideline for monetary policy, while the Board serves as
the executive body. It is empowered to adjust policy, within the mandate provided by the
FOMC, when necessary in the period between FOMC meetings. Thanks to a rotation system,
the reserve banks are involved in FOMC decision-making on an alternating basis. The
American legislature obviously meant the Fed to have a decentralized structure, in which the
regional reserve banks can each have their say. The aim was to prevent Fed policy-makers from
catering unduly to the wishes of either the financial centre, i.e. New York, or the political hub,
i.e. Washington. In spite of the decentralized nature of the Federal Reserve System, however, a
certain specialization tendency has increasingly developed over the years, due in part to
technological innovations and market developments. Take, for instance, the operations ensuing
from the Fed's monetary tasks, such as money and foreign exchange market interventions.
These are effected in their entirety in New York. In other areas, too, such as the payments
system, the reserve banks have developed their own specializations.
4. In determining monetary policy, the Fed relies on regional input. The reserve
banks contribute to policy through their role in the discussions and the number of votes they can
cast (five out of a total of twelve) at FOMC meetings. At these meetings no fixed policy
proposals are presented in advance, the aim being an open discussion where the various parties
reach agreement through mutual persuasion. Any decision should, after all, be endorsed by as
many parties as possible. Obviously, in this American context, the chairman must be someone
of considerable stature. I believe that involving the reserve banks in policy-making and in the
efforts to expound that policy to the folks back home is the right way to go about things,
reinforcing as it does the cohesion within the system.
5. In short, the Fed operates what is in my view a well-balanced model of
monetary decision-making. Though policy is conducted centrally, the various interests of the
separate regions are not overlooked. The System is furthermore capable of reacting adroitly, as
evidenced by the United States' long-term record of strong economic growth and modest
inflation.
6. How does everything I have just said translate to the future situation in
Europe? As in the United States, policy in Europe will be determined centrally and
implemented, where possible and appropriate, decentrally. In Europe, too, an institutional
division into three components will be instituted. Specifically, the ESCB will be made up of
three elements, the ECB Executive Board, responsible for day-to-day policy, the ESCB Council,
made up of this Board and the governors of the national central banks, and the national central
banks themselves. There are considerable similarities between this structure and that of the Fed,
made up of the Board of Governors, the FOMC and the reserve banks. Yet the emphasis will,
on some issues, be placed differently.
7. One difference concerns voting arrangements within the ESCB Council, which
are not the same as those within the FOMC. In the ESCB Council the votes of the national
central banks, represented by their governors, will predominate over those of the Executive
Board. In the FOMC, it is the votes of the centre, i.e. the Board of Governors, which represent
the majority. This means that if effective decisions are to be arrived at in Europe, the national
central bank governors will have to be like-minded; in other words, policy-makers will have to
abandon their purely national outlooks, exchanging them for a "European perspective". The
experience of the FOMC shows that is can be achieved. The ESCB will have the important task
of helping to foster such a European perspective, with the centre taking the initiative. The
European outlook will furthermore have to be disseminated among the general public. An
ESCB making an effort to explain and seek understanding for its policy decisions will generate
support for its actions. This is a task for the national central banks, whose historical ties to their
own peoples are deeply rooted. In this respect it should also be kept in mind that the Fed's
accountability to Congress has no equivalent in Europe. Although the President of the ESCB is
expected to appear periodically before the European Parliament, the latter does not have the
same powers as the US Congress, which can in principle amend the Federal Reserve Act.
Furthermore, any discussion of the European policy mix will be different in nature because
budgetary policy will remain the province of the European Member States. This policy will,
however, be subject to the limitations set out in the Stability Pact recently agreed by the Member
States, which as you know aims to foster sustained sound public finances in Europe.
8. What I have just said about the need to develop a "European" perspective has
implications for monetary and economic analysis. The centre will need to have at its disposal
considerable analytical machinery in order to be able to perform this pioneering role
successfully. As a system of European statistics and analysis cannot be set up overnight, no time
should be lost. Indeed, the preparations being made at the EMI in this area are proceeding at full
steam. Of course, these new statistics will take getting used to. But, at the same time, some
things will remain unchanged. National analyses will continue to play an important role so long
as Europe has not been transformed into a single economy. After all, if we wish to understand
what is happening at the European level, we would be well advised also to look at the underlying
national economic relationships. With respect to these analytical tasks, the division of labour
between the centre and the national central banks is likely to evolve of its own accord. At first
glance, this division seems likely to reflect that the national central banks know their own
economies best.
9. Contrary to the US situation, the implementation of monetary policy in Europe
will not take place at one location away from the centre but, where possible and appropriate,
decentrally. That has to do with the fact that Europe's central banks and financial markets have
a rich and extensive history. A decentral approach makes allowance for differences in European
practices and market conditions. In this context it should be noted that the formulation chosen
for decentralization in Europe in principle allows for the ECB to play a role in policy
implementation. There is no knowing in advance how the tasks will be divided among the
national central banks themselves, and between them and the centre in the more distant future.
The American example shows us that such matters cannot be laid down in a blueprint for
eternity. Decentralization is a sound principle to cater to initial national differences in the
financial markets, but it must not stand in the way of further integration. In other words, policy
must accommodate the disappearance of national financial market characteristics and the
emergence of a single integrationa European money and capital market.
10. EMU will remain a union of different countries. This means, among other
things, that the differences prevailing among the various central banks regarding their
non-monetary tasks can, in principle, continue to exist. I am referring here, for instance, to
banking supervision, surveillance of payment systems, and the fiscal agent function for the
benefit of the Government. It is interesting to see that in the United States, where such matters
have been organized in a uniform manner, some degree of specialization has emerged among the
regional reserve banks. Owing to the continuing existence of national responsibilities and
practices, this extent of specialization will not be feasible in Europe.
11. I have arrived at the conclusion of my address. Like the Federal Reserve
System, the ESCB will be characterized by central and decentral elements. However, the mix
will not be the same, due to differences in the starting position, as well as in social and political
conditions. Yet the experience of the Federal Reserve System offers instructive insights. It
highlights the importance of "homogenous" thinking within the system, and of focusing on the
European perspective, without disregarding regional developments. It will be a challenge for us
in Europe to ensure that a similar balance is achieved within the ESCB.