Willem Duisenberg: consensus builder
The European Central Bank under president Wim Duisenberg has proven remarkably flexible on monetary policy. Modelled on Germany's Bundesbank, most of the 17 members of its interest rate-setting governing council were inculcated with that institution's hard-money philosophy. But not all of them.
Among the least Bundesbank-like on the council are bankers from Spain and Finland. One of their most significant victories has been the ECB's decision to use a variety of inflation indicators rather than rely on money-supply figures. They have also introduced a spirit of compromise in interest-rate policy the Bundesbank would have frowned upon.
For example, in December, before the ECB was even officially in charge of eurozone monetary policy, Duisenberg, with key support from French central bank governor Jean-Claude Trichet and Bundesbank president Hans Tietmeyer, convinced fellow ECB council members to institute coordinated rate cuts. These lowered the floor for eurozone interest rate convergence from an expected 3.25% to 3% and gave a much needed fillip to the core economies of Germany, France and Italy. This was approved even with European-wide money supply growth in excess of the Bundesbank's targets and those of most other European banks. Equally surprising, the central bank governors of Spain, Portugal, Ireland and Finland all supported the coordinated action, despite national growth and inflation rates that did not, on their own, justify a cut. As, Tommaso Padoa-Schioppa, the governing council's most pro-European member, says, the move made it clear that "Duisenberg is a talented consensus maker". It also proved that even the Bundesbankers on the ECB council aren't irredeemably hawkish.
There are only two tried-and-true Bundesbankers on the governing council. The scheduled retirement of Europe's pre-eminent financial statesman, Tietmeyer, only nine months after the ECB started running monetary policy, and his replacement by the less well known Ernst Welteke, has further weakened Bundesbank influence, as has Germany's relatively weak economic performance. Although council votes are not officially disclosed it is widely believed that the Bundesbank preferred a more hawkish stance in April when the ECB approved a second but larger 50 basis point cut.
Overshadowing the Germans is Banque de France governor Jean-Claude Trichet. Trichet has emerged as a tireless pro-European (and self-promoter) and the biggest vote swayer on the governing council. Trichet argues unconvincingly that the eurozone is in one economic cycle and that there is no danger of economies decoupling even if growth is widely divergent. In public comments to help establish ECB credibility, he cedes to Duisenberg.
With the exception of Otmar Issing, who is firmly part of Duisenberg's team as ECB executive board economist, Bundesbankers grumble that their bank is still the most important in Europe and often contradict the majority line, undermining ECB credibility. Welteke has publicly stated that the ECB's last rate cut was not necessary while Tietmeyer has given Duisenberg a public dressing down over exchange rate policy. The Bundesbank has also vehemently opposed Duisenberg's notion of centralizing bank supervision and regulation.
The euro, which lost 15% between January and July, might have stabilized sooner had it not been for the ECB's lack of transparency.
Without the timely publication of minutes Duisenberg has suggested a 16-year closed period and is even against unattributed summaries it has been difficult for markets to get a reliable picture of the governing council's concerns. Duisenberg, with backing from Issing, argues that keeping markets guessing keeps options on monetary policy open. "We are rather pleased about the unexpectedness," he says. His own contradictory comments on interest rates designed to preserve cherished "unexpectedness" are becoming notorious.
Sacred calling
"The attitude of the ECB is typical of a central bank tradition that views central banking as a sacred, quasi-mystical vocation [performed] far from the prying eyes of non-initiates," writes William Buiter, a member of the Bank of England's monetary policy committee (and a possible successor to ECB vice-president Christian Noyer in 2002), in an influential recent paper, "Alice in Euroland". This mystique is ... a threat to the legitimacy of the purposes the central bank is intended to serve: price stability [and] preventing and coping with systemic financial risk."
Indeed, there is deadlock on whether financial regulation and supervision should be centralized. Though at least half the executive council: Duisenberg, Padoa-Schioppa and Sirkka Hämäläinen (formerly the governor of Finland's central bank), as well as several national central bank governors, including Maurice O'Connell of Ireland, support greater supervision from the centre, many oppose it, most notably Antonio Fazio, reigning Eurosceptic on the ECB board and governor of the Banca d'Italia.
Centralization's proponents argue that opposition is based on a desire to protect national banks from pan-European competition and cross-border takeovers. They fear no European-wide organization, certainly not the ECB, is collecting the kind of information about national bank systems that could permit it to effectively head off a pan-European banking crisis. Even if this perception is false, the ECB's opacity is dangerous. "I hope and expect, that even if they are not telling us about it, the ECB [is] creating the informational and authority chains to effectively implement" financial market supervision and regulation, writes Buiter.
Willem Frederik Duisenberg: President, ECB
Wim Duisenberg, 64, has done well to forge consensus at the 17-member European Central Bank council. A tall, chain-smoking economics PhD with an unruly mane of white hair and a 17 handicap at golf, Duisenberg is also not the hawk many expected.
Although he rose to prominence as a free-spending Dutch socialist finance minister, he won hard-money spurs during a 15-year stint as president of De Nederlandsche Bank. He reined in wages, forced the government to cut spending and crushed inflation by tying the guilder to the Deutschmark.
In 1997 he was appointed to head the European Monetary Institute, the ECB's precursor, but his candidacy for the ECB was blocked by the French. Called Monsieur Cinq Secondes by critics allegedly that's how long it took for the Dutch central bank to follow German rate moves Duisenberg was appointed ECB president only after French president Jacques Chirac extracted a German promise that Duisenberg would step down mid-way through his eight-year term and allow a Frenchman to take over. A staunch advocate of central bank independence, Duisenberg promptly informed the European parliment that he would remain in his post for at least four and possibly eight years.