The single monetary policy: the role of transparency and openness
Speech delivered by Ms Sirkka Hämäläinen, Member of the Executive Board of the European Central Bank, at the Citizens' Agenda 2000 NGO Forum on 3 December 1999 in Tampere
I am very grateful and honoured for the opportunity to take part in this hearing on topics related to democracy, citizens' rights and the European Union, on the way to bringing decision-making at the European level closer to the citizens. These are topics I find of vital importance for the future of the project of European integration.
There seems to be a general consensus - at all levels of society and across the full political spectrum - on the need to bridge the gap between decision-makers and citizens of the European Union. Over the last few years, we have experienced a new emphasis on openness and transparency at the European level. This emphasis is encouraging, although much still remains to be done and we have only seen the beginning of this process.
Despite the wide scope of the topic for today's hearing, I will, in my presentation focus on how the Eurosystem (comprising of the European Central Bank (ECB), located in Frankfurt am Main, and the 11 national central banks of the countries which have adopted the euro) is dealing with these issues.
In the public debate, the Eurosystem has now and then been criticised for not paying enough attention to transparency and openness. I find this criticism rather unfair; few other central banks in the world are putting as much emphasis on explaining their policy actions to the public in a timely and detailed manner. But the fact is that the very nature of central banking makes it inappropriate - or even impossible - to give the public a full insight into the deliberations, plans and decision-making process, without the risk of harmful market reactions and imbalances. I will try to clarify our priorities in this respect. However, I would first like to give a short institutional background to the single monetary policy.
When on 1 January 1999 the euro was adopted by 11 countries of the European Union, the Eurosystem took over the responsibility for monetary policy in the whole of the euro area. The highest decision-making body of the Eurosystem is the Governing Council, which is composed of the six members of the ECB's Executive Board and the 11 governors of the participating national central banks. The Governing Council makes the monetary policy decisions, such as the decisions on the ECB interest rates, on the basis of one person, one vote. The Executive Board is responsible for the decisions on the implementation of monetary policy, while the actual operations are carried out in a decentralised way by the national central banks.
The introduction of the euro was a very important step in the European integration process - not only because it links the economies of the participating countries even more closely to one another - but also because of its symbolic and psychological impact. The own currency is traditionally an important symbol of the national identity of any country. These national symbols are now in the process of being replaced by a pan-European symbol - the euro.
The new currency is still abstract to most European citizens since it only exists as a transaction currency recorded in computer systems. The euro banknotes and coins will be introduced in the year 2002. Only then will the effects of the single currency become concrete for all citizens.
The fact that the participating countries have handed over an important economic policy tool, i.e. their monetary policy, to a common European institution is an extra-ordinary achievement in the process towards further European integration. The benefits and drawbacks of a single monetary policy have been debated for decades and I do not intend to enter into the arguments of this debate here and now. I am sure, however, that you will not be surprised if I tell you that, personally, I am fully convinced that the single monetary policy has produced - and will continue to produce - important benefits for the participating countries.
When the Eurosystem started its operations at the beginning of this year, it was in many ways already in a fortunate position. It was able to benefit from the credibility built up by the national central banks of the participating Member States. Moreover, the institutional basis of the Eurosystem, as laid down in the Treaty on European Union (the so-called Maastricht Treaty), was an important fundament for ensuring credibility.
The Treaty clearly specifies that the Eurosystem's primary objective is to maintain price stability. The logic behind this primary objective is clear: The best way monetary policy can contribute to growth, employment and social welfare is by ensuring stable prices in the economy. In a credible environment of low inflation, expectations and interest rates are stabilised at a low level. This, in turn, improves the conditions for growth and employment. Here, I would like to strongly underline that the structural unemployment problem in Europe can not be solved by monetary policy. It requires several structural measures, particularly in order to improve the working of the labour markets.
The Treaty also ensures that the Eurosystem is truly independent from political influence in the pursuance of its objective. In the public debate, the principle of a central bank beyond direct political control is sometimes questioned. Personally, I think that it is indeed warranted to ensure that monetary policy decisions are not taken on the basis of political considerations. The central bank has only one tool, the short-term interest rate, and its monetary policy task is very narrow. Credibility demands that the short-term interest rate is set with a view to ensuring price stability over the medium term. This requires that the monetary policy setting is based on thorough medium-term economic analysis, without the influence of short-term political deliberations. The experience of many countries in the 1970's and 1980's has shown that short-termism and excessive political influence over monetary policy easily leads to high inflation, exchange rate instability, loss of credibility and, thereby, to lower growth and increased unemployment.
It is important to underline that the Eurosystem's independence is a part of the institutional set up, which was decided by politicians in a democratic manner. In fact, it was endorsed by the Parliaments of all 15 EU Member States.
Within the Eurosystem, we are indeed very conscious of the fact that, this independence means that we have to carry out our tasks with utmost responsibility. It must be possible to justify and explain any monetary policy action - to the political decision-makers as well to the markets and to the public. Accountability, transparency and openness go hand in hand with central bank independence.
In order to ensure that the Eurosystem is accountable for its actions, the Treaty specifies clear rules for regular reporting to the European Parliament. The European Parliament may request hearings with the President of the ECB and other members of the Executive Board. In addition, the national central banks are normally subject to similar accountability procedures vis-à-vis their political decision-makers at a national level.
In order to ensure a high degree of transparency and openness, the Eurosystem has taken several initiatives. Firstly, the Governing Council adopted a quantitative definition of the price stability objective. Price stability was defined as a year-on-year increase of below 2% in the Harmonised Index of Consumer Prices (HICP) for the euro area. This is a medium-term objective.
Another element aimed at enhancing the transparency of monetary policy implementation is the explicit monetary policy strategy. The strategy serves a two-fold purpose: first, it establishes a framework for analytical discussion within the Eurosystem and, second, it provides a basis for explaining monetary policy actions to the public. The strategy is based on two "pillars".
The first pillar is the prominent role of money. This was signalled at the end of last year by the announcement of a reference rate of 4.5% for the year-on-year growth of the euro area monetary aggregate M3. This reference value was in fact reviewed yesterday by the Governing Council and it was reconfirmed for the coming year
The second pillar of the strategy comprises a broadly based assessment both of the outlook for price developments and of the risks to price stability on the basis of a wide range of economic and financial indicators. This set of indicators includes, among others, real economic activity, employment, wages, asset prices, import prices, the exchange rate, yield curve analysis, surveys on inflation expectations and fiscal policy indicators.
In the public debate, this two-pillar monetary policy strategy has been criticised for being too vague or too complex. However, I do not think that the strategy is weak just because it relies on a broad set of indicators and allows the central bank some degree of flexibility in its monetary policy analysis. A mechanistic approach to monetary policy implementation is not wise under any circumstances. Central banks in many countries all over the world have, over the last decade, widened their analysis to include a broader set of indicators when assessing the outlook for inflation. In fact, there is no fundamental difference between the Eurosystem's approach to monetary policy and that of most other central banks of industrialised countries.
Another very important aspect of accountability and transparency relates to the channels used in communications with the public. As I have already mentioned, the Eurosystem places great emphasis on giving detailed and swift explanations of policy decisions to the public. These are crucial elements of our communications policy. For this purpose, we use several communication channels; the most important of which are:
the issuance of a press release on monetary policy decisions immediately after each fortnightly Governing Council meeting;
the organisation of a press conference at the ECB immediately after the first Council meeting each month;
the regular and frequent appearances of the President at the European Parliament;
the ECB Monthly Bulletin; and
the numerous speeches and articles held or published by the members of the Governing Council.
Taken as a whole, the Eurosystem is probably one of the most active central banks when it comes to explaining its policies to the public. Still, we see some criticism that the Eurosystem is not sufficiently transparent. A cornerstone of this criticism is that the minutes of the Governing Council meetings are not published. On this point, I should like to explain why I think that it would not be appropriate to publish such minutes.
First, it should be noted that none of the national central banks in the euro area published the minutes of the meetings of their decision-making bodies before the establishment of Monetary Union.
Second, if detailed minutes and voting records were published, the very good discussions we currently have in the meetings of the Governing Council would certainly become less frank and open-minded. The successful implementation of monetary policy requires that all members of the Governing Council have a euro area perspective, rather than a national perspective, in their policy discussions. Such a euro area-wide perspective would not be fostered if members were subject to public, and especially "national", pressure.
Third, international experience has shown that a publication of minutes will not necessarily contribute to the efficiency of the monetary policy - which means price stability at lowest possible interest rate - and to a better understanding of the monetary policy decisions. Instead, it often leads to undue attention, in media and in the public discussion, to perceived differences in views among individuals, rather than focusing the debate on actual monetary policy analysis.
My conclusion is that it is far more important that we give thorough and detailed explanations of our analysis and assessment of the economic situation in justification of the direction of monetary policy, rather than giving details on possible voting records or individual views.
Criticism has also been put forward that the Eurosystem's internal forecasts - particularly inflation forecasts - are not published. A public inflation forecast could admittedly improve the transparency of the implementation of monetary policy but not necessarily help the efficiency of monetary policy.
The role of the ECB's own inflation forecasts in the decision-making process should not be overestimated. They are, of course, an important element of information that is taken into account, but they cannot be the sole basis for monetary policy. The assessment of risks and uncertainties has an important role in the decision-making. In addition, publicly available forecasts from different sources - official and private - are usually giving a rather unified picture of the expected inflation developments in the euro area.
Finally, I want to underline that it would not be wise for any central bank to start publishing forecasts before it has sufficient experience with its analytical framework. Starting to publish forecasts is a once-and-for-all decision, which can hardly be reversed, and it must be prepared carefully. But, as President Duisenberg said at the press conference after yesterday's meeting of the Governing Council, it is likely that we will start publishing forecasts later, perhaps in the course of next year.
I would like to conclude my introduction by stressing that experience of the first year has shown that the decision-making process as well as the operational framework and procedures of the new central bank are working very well. The firm monetary policy implementation seems also to have strengthened the Eurosystem's credibility. I can assure you that we will also in the future continue to do our utmost to ensure the highest possible degree of transparency and openness in monetary policy implementation. As I already said, I think that, despite the criticism, we have achieved quite a lot in this respect. But naturally, further efforts are needed.
Personally, I am convinced that the single currency and the common monetary policy will be highly successful, not only as a means of promoting economic and social welfare in the participating countries, but also as a powerful symbol and catalyst of an integrated Europe. In a way, the euro will make the European integration process visible and tangible for all citizens. I am personally glad and proud of being a part of this project.