WRITTEN QUESTION E-1600/00

by Erik Meijer (GUE/NGL) to the Commission

(19 May 2000)

Subject: Public disclosure of decision-making on interest rates applying the British model to the European Central Bank

1. Has the Commission taken note of the current strong position of the Pound sterling relative to the euro, having regard to the latter's recent steep fall in value (from 71 pence on its launch date to 59 pence)?

2. Public interest in changes in interest rates and in how such changes are determined has played an important part in the recent jockeying for a dominant position as an international trading currency between the euro, the pound sterling and the US dollar. In the US Federal Reserve the decision is taken by one person,

whereas in the European Central Bank the decision is a collective one, arrived at in deepest secrecy on a basis of consensus but without the requirement of unanimity. By contrast, the members of the Bank of England's Monetary Policy Committee (MPC) decide changes in the interest rate by majority voting, and their voting record is also made public. According to some economists, that transparency is one of the factors helping to keep the Pound sterling at its present high level.

Does the Commission share the view of Professor Willem Buiter, an MPC member of three years' standing now preparing to move on to an appointment with the European Bank for Reconstruction and Development, who stated in an interview on 29 April 2000 with the Netherlands daily De Volkskrant that the present British system was superior to that of Europe or the United States?

3. For what reasons has the European Central Bank's decision-making process hitherto been less open to public scrutiny than the Bank of England's?

4. What action will be necessary to ensure that European Central Bank transparency on setting interest rates can be made as complete as that now observed by the Bank of England?

5. Would the Commission be prepared to advocate that the European Central Bank adopt the Bank of England's method of setting interest rates?

Answer given by Mr Solbes Mira on behalf of the Commission

(3 July 2000)

1. Member States are required by the EC Treaty to treat their exchange rate as a matter of common concern. While the Commission has no direct responsibility for the monetary and exchange rate policies of the Member States, the Commission provides analyses for the regular exchange rate surveillance carried out by the Economic and Financial Committee, the Ecofin Council and the informal Euro-11 Group.

The Commission has taken note of the movements in the exchange rate of the Pound sterling relative to the euro. Short-run movements in the exchange rate of the euro against other currencies may occur for a variety of reasons and do not draw into question the long-term stability of the euro, either in terms of internal stability (i.e. stable purchasing power of the euro as implied by the maintenance of price stability), or in terms of a stronger external value of the euro reflecting the favourable economic fundamentals of the euro area economy.

The experience with floating exchange rate regimes show that exchange rate movements may be relatively large and volatile, with a tendency for exchange rates to overshoot their longer-run equilibrium levels. The movements in the sterling-euro exchange rate can mainly be explained by differences in cyclical positions and other economic factors implying differences in interest rates and expected returns. Analyses show that the effective (i.e. trade-weighted) exchange rate of sterling is significantly above its longer-term average, while that of the euro is significantly below its long-term average. These divergences can be expected to unwind over time, although it is very difficult to predict when this will occur.

2. International experience indicates that a number of institutional set-ups and varying monetary policy strategies may be compatible with successful monetary policy. Most observers would concur that the monetary policies of, e.g. the United States Federal Reserve, the Bank of England, and formerly the Bundesbank have, in general terms, been successful at achieving the objectives set for them. There should be no presumption that one system is universally superior to all others and could be transposed to other conditions than those for which it was designed. The institutional framework for Economic and monetary union (EMU) is treaty-based and it is tailored to the needs of a union of independent Member States which have agreed to share the same currency. Therefore, it does not seem completely appropriate to compare the European Central Bank (ECB) system to the British system.

Moreover, the criticisms attracted by the ECB appear largely unjustified. The ECB, which is a new institution responsible for the monetary policy of a new economic entity, has showed the ability to react flexibly and appropriately to economic developments. The ECB has used a variety of communication tools e.g. the quarterly hearings of its President before the Parliament, the monthly press conferences which follow the meetings of the governing council, its monthly bulletins and annual reports to explain the reasons for its monetary policy decisions and the underlying monetary policy strategy.

3. It is debatable whether the ECB has been less open to public scrutiny than the Bank of England. The ECB has been open through a wide array of communication tools. These include written documents, namely the ECB monthly bulletins and the annual report, the press releases and research papers; the monthly press conferences of the President and Vice-President of the ECB after the meetings of the governing council; the (at least) quarterly hearings of the ECB President in the Parliament; the numerous public appearances of executive board members.

4. and 5. The Commission is of the view that the conduct of monetary policy by the ECB has been appropriate and well-tuned to changing economic circumstances.

Furthermore, on the basis of the reasons stated above, there should be no automatic presumption that the rules and procedures followed by the Bank of England could or should be transposed in their entirety to the Eurosystem. Each issue has to be assessed on its merits in the specific context of EMU.

It should be stressed that, while the Commission takes part in the public discussion on economic policy and thus also on monetary policy, deciding on the monetary policy strategy and on the most appropriate communication strategy for the Eurosystem (including the potential publication of minutes and voting patterns) is, on the basis of the EC Treaty, an exclusive responsibility of the ECB.