Alice in Euroland  

The legal framework, institutional arrangements and emerging operating practices of the ECB/ESCB are flawed and in urgent need of modification.  At the very least, the ECB’s deficiencies pose a threat to its continued operational independence.  Beyond that, they could put the common currency’s survival at risk. That is the message in the first in a new series, Policy Paper, published by CEPR, entitled Alice in Euroland. Professor Willem Buiter argues that “a threat to the common currency is a threat to the entire EMU edifice and to the continued success of the post World-War II European integration process”. 

Change will have to come quickly to the ECB.  Some of the necessary changes are constitutional in nature and require amendments to the Maastricht Treaty.  This is a difficult, cumbersome and slow process.  Among the constitutional changes proposed are the following:

Abolish the ‘one-country-one-seat-on-the-Governing-Council’ rule; restrict the size of the Governing Council to no more than nine members and the size of the Executive Board to no more than four members.  

Abolish the clause in Article 109 giving the Council of Ministers the power to formulate ‘general orientations’ for exchange rate policy.  This clause creates doubts about the domain of substantive operational independence of the ECB.  

Charge the ECB explicitly with responsibility for systemic financial stability in Euroland.  The words ‘lender of last resort’ should be used in the revised Treaty.  

Create a body that has the power to vet and make binding recommendations about the procedures used by the ECB.  One possibility is that this supervisory body would consist of MEPs and members of the European Court of Justice.

Other necessary changes can be made overnight, at the discretion of the Governing Council itself.  They include the following:

• Publish the minutes of the meetings of the Governing Council and of its relevant committees and sub-committees.  

• Publish the individual voting records of Governing Council members.  

• Publish the inflation forecast.  

• Clarify the operational inflation target.  

Abandon attempts to create a culture of ‘collective responsibility’.  Presenting a spurious united front to the outside world adds to uncertainty about the likely future stance of monetary policy among market participants and the public at large.  It also would slow down the Governing Council’s ascent of the learning curve. 

A third category of changes does not require Treaty amendments, but cannot be implemented at the sole discretion of the Governing Council either.  These include the following:

Strive for institutional arrangements and practices that make for better co-ordination of monetary and budgetary policy in Euroland.  Flesh out the lender of last resort function of the ECB.  Note that this does not have to wait until the Treaty is changed.  While formal recognition, in an amended Treaty, of the ECB’s systemic financial stability role and lender of last resort function would be helpful, the existing Treaty does not proscribe such a role and function.  The ECB should just get on with it.  

Spread the message that authority in the ECB/ESCB is centralised.  National Central Banks are useful conduits for national information.  Independent NCB research departments provide useful safeguards against intellectual ‘democratic centralism’.  Beyond that they have no essential function and certainly no substantive authority.  The Treaty is clear on this, but not all NCB governors appear to have read or understood the relevant passages.  This creates unnecessary uncertainty in the markets and among the public at large.

Evolve a European Parliament with teeth.  It does no good either to the European Parliament or to the ECB to have the President of the ECB walk all over the MEPs.

Buiter concludes by expressing the hope that the ECB/ESCB will change along the lines indicated above, and that EMU will succeed in generating greater Euroland-wide prosperity than would have been likely under any alternative monetary arrangement.

CEPR is a network of over 450 Research Fellows based throughout Europe, who collaborate through the Centre in research and its dissemination. CEPR helps its Research Fellows to develop projects, obtain their funding, administer them and disseminate their results. The Centre’s research ranges from open economy macroeconomics to trade policy, from the economic transformation of Central and Eastern Europe to regionalism in the world economy. For further information about CEPR, please contact Rita Gilbert, External Relations Officer, Tel: 44 20 7878 2917,email: rgilbert@cepr.org or www.cepr.org. Out of office hours, please call (+ 44) (0) 777 560 7786.

The Policy Paper series was launched by CEPR in 1999 to provide a forum for the analysis of important policy issues by leading researchers. The series aims to identify key policy issues; apply the best and most up-to-date research to help understand these issues; and to explore the implications of this research for the design and conduct of policy.

The research underlying this presentation was supported by a ROPAs grant from the ESRC.

Willem Buiter is Professor of Economics at Cambridge University, a Member of the Monetary Policy Committee of the Bank of England, and a Research Fellow in CEPR’s International Macroeconomics and Transition Economics programmes. The views expressed in this paper are those of Professor Buiter and not those of the Monetary Policy Committee, or of CEPR which take no institutional policy positions. 

This is a revision of a Journal of Common Market Studies Annual Lecture, given on Tuesday, 15 December 1998 at South Bank University, to be published in the Journal of Common Market Studies, Volume 37, Issue 2 by Blackwell Publishers Ltd, June 1999.  This paper is reprinted with kind permission of the publishers.

‘Alice in Euroland’

Willem H Buiter

CEPR Policy Paper No. 1

Embargo: 00.01, 21 April 1999

ISSN 1466 – 674X

Available from: CEPR, £10.00/$15/€15

90-98 Goswell Road, London EC1V 7DB, UK
Tel: (+ 44 20) 7878 2900  Fax: (+ 44 20) 7878 2999  Email: orders@cepr.org