“You may be surprised to hear that I agree with Wim,” said Christian Noyer after a journalist made a blundering attempt to drive a wedge between Noyer, the European Central Bank’s vice-president, and its president Wim Duisenberg. The trick question was whether the ECB should worry about unemployment as well as inflation when setting interest rates. Duisenberg’s answer was no, there was no trade-off between inflation and unemployment.
The press conference on July 8 in the ballroom of the Frankfurt Marriott hotel was only the second time since the ECB started in June that Duisenberg and Noyer had faced reporters’ questions. Their smiling solidarity suggested that there’s little prospect of any public dissent among the members of the ECB’s executive board – five seasoned central bankers and a French public servant.
“[The] policy views of members of the governing council have converged to a very large extent over the many years they have been meeting in different forums,” Duisenberg says. Euromoney quizzed all six of them on their economic views and found their answers – to questions not pre-censored by Bundesbank-style spin-doctors – fiercely orthodox.
All six believe monetarism provides at least some of the answers to economic dilemmas (Noyer is the only one who appears hesitant); all believe in price stability as the ultimate goal of central banking; none would shrink from criticising governments whose fiscal policies impinged on their monetary policy. There is no need to ask whether they believe in an independent central bank. Such strong consensus among central bankers from six different countries would have raised eyebrows several years ago.
The outward harmony within the group contrasts with the Bank of England’s monetary policy committee, where nine individual views are revealed every month in published minutes, betraying radically different points of view.
At this early stage, before the ECB has won credibility as the worthy successor of the Bundesbank, diversity of publicly-expressed opinion can hardly be in the ECB’s interest. Four-year veterans of the European Monetary Institute (EMI), which has now metamorphosed itself into the European Central Bank, say that the organization is having to change its style radically as the staff at Frankfurt’s eurotower switch from a Napoleonic to a collegiate system.
Benign dictatorship
Duisenberg as Napoleon was able to make decisions alone and apply them swiftly. Insiders at senior levels say this benign dictatorship made sense for the EMI, which needed to set up diverse technical systems, assess all possible options for monetary operations and policy, payments and economic analysis, and practise using those techniques for real – all against deadlines. And there was no shortage of political support to encourage swift action.
After a year as EMI president, Duisenberg keeps his old office overlooking the river Main. But he has to reinvent himself as the head of the European Central Bank. There’ll be no politicians around. Duisenberg and his staff have been cut free of all political influence, whether constructive or intrusive.
From now on, the directorate of the ECB will speak with a single voice. Duisenberg is determined to ensure outward if not inward consensus. Decisions are now made on a unanimous basis. The bank will discourage any attempts by ECB watchers to find out what individual members argued on a given day, Bank of England-style.
Furthermore, minutes of the monthly governing council meetings will be kept secret for 16 years, evidently to prevent the views of central bankers becoming known to their governments. That might expose the central bankers to pressure to take decisions which assist government economic policy, such as keeping interest rates down to stimulate employment.
When leaks occur – and they already have – the heads of national central banks will generally be to blame. After the monthly meetings the governors will be keen to spread the word that their own country’s concerns were at least considered.
It was the central bankers – one was Yves Mersch of the Banque de Luxembourg – who confirmed immediately after the council meeting on July 7 that a minimum reserve would be imposed. For weeks in advance there had been rumours that the July 7 meeting would decide on a minimum reserve requirement and the ECB’s gold reserves. More than just speculation, these hints were leaks, as insiders confirmed later.
Watch the birdies
ECB-watching is becoming a new profession. Several hundred private-sector economists plan to follow European Central Bank policy continuously. Their aim is to discover the personalities and philosophies of these six economists, and the relationships between them and the 11 central bank governors on the governing council. Their ultimate goal is to second-guess monetary policy decisions.
Although the six agree on the big issues, Duisenberg, Eugenio Domingo Solans and Sirkka Hämäläinen in particular are keen to put more flesh on the bones of the Bundesbank-style thinking expressed in the ECB’s early public statements. The views of Duisenberg and the Bundesbank’s ex-chief economist Otmar Issing are well known, but ECB watchers freely admit that the arrival of Domingo Solans from the Bank of Spain, Hämäläinen from the Bank of Finland, Tommaso Padoa-Schioppa from the Bank of Italy and Noyer from the French ministry of finance has caught them on the hop.
Domingo, Hämäläinen and Padoa-Schioppa may well become the most influential economic thinkers on the board after Issing, according to economists at the ECB. Inside and outside the bank, the race is on to find out what exactly each of them believes.
“The travel and entertainment budget should be the largest item on their expenditure sheet,” jokes Cesar Molinas, Spanish economist at Merrill Lynch. Sexy dancers and popular music at the ECB’s opening ceremony in Frankfurt in late June contrasted strongly with the formal events staged by the Bundesbank – although there were even more speeches.
Duisenberg is famous for his lack of tact too. Last year he taunted Bundesbank president Hans Tietmeyer with the observation that, being German-born, he didn’t have to compete for the top slot in Dutch central banking. (Duisenberg was the Netherlands’ minister of finance for four years before going to the central bank in 1981.)
Economists inside and outside the ECB point out that Duisenberg at the Dutch central bank pursued a straightforward policy of shadowing the Bundesbank. Because he was utterly reliable and predictable in the past, Duisenberg was rewarded with the job of ECB president. But that predictability now weakens his position in internal debate.
Issing, the Bundesbank man, never followed but led. As the only one of the six who participated in the decision to set interest rates for Germany (and thus most of Europe), Issing has special clout. The bank’s new chief economist speaks from experience when he talks about the most difficult decision he has yet taken as a central banker – to propose an interest-rate cut when money growth far exceeded the (Bundesbank’s) target range.
“Central bankers have to deliver stable money; that is what they are appointed to do,” says the man known as the Bundesbank’s hawk.
Hämäläinen is also known for her toughness. As newly-appointed governor of the Bank of Finland, she recalls how she allowed the markka to float in autumn 1992 when “the Finnish economy and Finnish banks and firms were heavily indebted abroad. The decisions which were consequently taken in order to bail the banks out were complicated and painful”.
But Padoa-Schioppa dislikes the term hawk: “Central bankers are not birds. They are human beings who try to be rational and to exercise good judgement.”
Toughness may be one measure. Their score on the Richter scale of monetarism is another. Issing “is an arch monetarist,” says Jörg Schmieding, German economist at Merrill Lynch.
Both Duisenberg and Issing, asked what they find intellectually attractive about monetarism, reach for the same line from monetarist prophet Milton Friedman: “Inflation is a monetary phenomenon.” Duisenberg contrasts himself with ” pure monetarists”, by arguing that in the short to medium term, inflation is determined and affected by many other non-monetary factors such as wages, budgetary policy and the price of raw materials. “Therefore money matters, but not only money.”
Although there’s no doubt about the Holy Grail – setting interest rates to maintain the value of the euro – the six knights of the round table may differ slightly on the criteria for setting rates.
Should the bank use a monetary or an inflation target for monetary policy? Should any measure other than currency stability matter?
The six won’t be drawn on that question, which is still being discussed inside the ECB, but their past policies shed some light on the views they are presumably expressing in internal debate.
Noyer, the youngest at 47, is a career public servant whose claim to fame was in negotiating the rescheduling of Russia’s debt to sovereigns and, more recently, in thinking about the reform of French banking.
It is telling that the French government should select one of its own ministry officials as its nominee at the ECB. With Banque de France governor Jean-Claude Trichet himself on the general council, the French government has taken the opportunity to neutralize the Banque de France view, which it has often criticised for ignoring the economic consequences of a restrictive monetary policy.
Asked about monetarism, Noyer is half-hearted: “Monetarism provides some of the conceptual tools necessary for the development of a sound economic policy.”
Issing, over the past two years, has begun advocating a combination of monetary targeting with inflation targeting, despite his reputation as an evangelist of monetary targeting. His latest thinking is that the two strategies have much in common, and that the defining factor is how important the monetary targets are to decision-making.
The same idea has been endorsed by Domingo Solans, best known outside Spain as a monetarist university professor and member of various commissions on Spanish economic reform. The Bank of Spain’s policy in recent years may have been pure Bundesbank, but its methods were not. “I don’t think Domingo Solans a monetarist,” says Merrill’s Molinas. “The Bank of Spain tried monetary targeting, first M1, then M2, then M3 and M4 and then gave up in 1994. Since then it has used an inflation target.”
The Spaniard argues against “simple and automatic rules governing the relationship between monetary growth and inflation. I am interested in monetarism insofar as it is connected with [monetary growth and inflation]. However, I must say that I am also interested in other approaches”.
Domingo Solans was a member of the Bank of Spain executive commission which has pursued a hard-money policy with the clear goal of forcing Spain to meet the Maastricht criteria and qualify for Emu. The bank raised leading interest rates by more than 300 basis points in six months, undeterred by 20% unemployment.
On past performance, however, the most extreme hawk of the six appears to be Hämäläinen. Totally uncompromising in pursuit of a tight monetary policy, the Bank of Finland drove the country into a severe recession in the early 1990s.
Aware of the stereotype, Hämäläinen is at pains to transmit a more sophisticated view. She argues that jobs are one of the ultimate objectives of economic policy: “The central bank has to pursue policies which are consistently in harmony with medium-term and longer-term stability, which means that its policies should neither be too loose nor too tight.” But unemployment is structural, not cyclical, she believes. “Any attempt to solve it by loosening monetary policy would be counterproductive.”
Duisenberg and Domingo distinguish between short-term and long-term policies. In the long term, Duisenberg argues, price stability is the best contribution a central bank can make to creating jobs (Noyer uses almost the same words). In the shorter term, however “policy-makers may be faced with a trade-off between more rapid disinflation and short-term employment creation”, Duisenberg adds.
“In the short term,” says Domingo, “the policy-maker should exercise caution in choosing the right moment to act, in deciding how far to go beyond the conventional 2% stability limit and in determining the pace at which to proceed. In other words, it is a matter of timeliness, intensity and rhythm.”
It is the most pragmatic statement expressed by any of them. ECB watchers point out that pragmatism rules: while Issing and the rest of the Bundesbank council believed passionately in the value of a monetary target, they missed that target every other year and did not seem unduly concerned.
