Fed chief
sees euro success - Nov. 20, 1998
Hands off, says
ECB - Nov. 06, 1998
European Central Bank
Federal Reserve Board |
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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.
Fiscal and Monetary Policy
"Monetary
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
Wacziarg.
He points out that Europe
lacks a unified political structure which will make it difficult to conduct
a monetary policy that would represent the different interests of 11 sovereign
nations.
"The lack of a true federal
fiscal structure will increase the likelihood of conflict over monetary
policy," he said.
Wacziarg co-authored with
Harvard University professor of economics Alberto Alesina a paper entitled
"Is Europe going too far?". It details the uncertainty about conducting
monetary policy in an environment of multiple political powers.
In it Wacziarg cautioned that
fiscal restraint under the stability pact may lead a cash-strapped country
to try to influence ESCB policy, "expanding the area of disagreement from
the fiscal to the monetary arena."
"Europe stands at a crossroads
in terms of institutional design," Wacziarg also said.
A Central Bank Without Banking Regulatory Power
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.
Former Federal Reserve Vice
Chairman Alan Blinder says central banks often need more power in times
of banking or financial crisis. "There is some virtue in having some of
the banks' supervisory and regulatory functions with central banks," says
Blinder, who also heads an international think-tank, The Group of Seven.
"At the very least, the central
bank should have very good information about what is going on with bank
supervision. That's a minimum requirement and the ECB would want that.
But it's one of the unresolved issues in the Maastricht Treaty."
There may be an easy resolution,
says Blinder. "I would not be surprised if some years from now, there is
one single European bank supervisory body." ![Link to top](bug.jpg)
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