Rocky road ahead for ECB
Bank may have too much power for
politicians, not enough for its own liking
December 8, 1998: 11:50 a.m. ET
|NEW YORK (Reuters)
- U.S. experts see potential political pressures as the main challenge
facing the European Central Bank when it sets a single monetary policy
for the 11 European nations launching the euro in January.
Richmond Fed Director of Research Marvin Goodfriend sees an obvious parallel to the fledgling European System of Central Banks (ESCB). "There is no question the Federal Reserve provides a model of sorts for the ECB," he says.
Both include an Executive Board while the ECB has 11 national central banks compared to the 12 Fed district banks.
But there are important differences between the two. When it comes to voting on monetary policy, the ESCB and the Fed differ markedly, says Goodfriend.
The seven Fed governors always vote while the 12 Fed bank presidents, except for New York, vote on a rotating basis. This means the governors will always have a greater say than the presidents.
But in the ESCB, the six members of the Executive Board -- the equivalent of the Fed governors -- vote, as do the 11 national central bank governors. Their views, therefore, could outnumber that of the Board's by almost 2-to-1.
"Federal Reserve history teaches that a decentralized system needs a strong center," says Goodfriend, who wrote a paper on federal central banking systems. "The Board of Governors exercises a lot more power in the Federal Reserve System than does the ECB in the ESCB."
The ECB's mandate is solely geared at fighting inflation, unlike the broader Fed goals that call for both price stability and maximum sustainable growth.
But the need to generate more economic growth may lead some European nations to lean on the central bank governors to seek a more stimulative monetary policy.
"We have before us a new enemy, which is not only the increase in unemployment but also the contraction of employment," Bank of Italy Governor Antonio Fazio said last month. It was the latest sign that economic growth rather than the fight against inflation will be European politicians' key priority in 1999.
union implies some sort of political bargaining over monetary policy
that eventually will need to be resolved through some sort of European
political process," says Stanford University professor of economics Romain
Another important function
of central banking is the banking supervisory and regulatory role. Unlike
the Fed, because it is not the central bank of any country, the ECB will
not have any of these responsibilities at first.
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