Rebuilding the Euro's Credibility: Urgent Action Is Needed If the European Central Bank Is to Succeed

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Urgent action is needed if the European Central Bank is to succeed

"Neither the European Central Bank, nor a national central bank, nor any member of their decisionmaking bodies shall seek or take instructions from Community institutions or bodies, from any government of a member state or from any other body." These are not the words of a censorious British onlooker preaching to French meddlers at last weekend's deal on the leadership of the ECB, but those of the Maastricht treaty, embodiment of Jacques Delors' own vision for the future of Europe.

But Europe's currency is in dire need of Anglo-Saxon thinking. There now remain only a few weeks to ensure that the ECB operates in a way which will be free of damaging, French-style political fixing. Ministers should not be bashful about pointing to the shining example in Threadneedle Street.

Gordon Brown's decision to make the Bank of England independent was underpinned by installing in its monetary policy committee a team of experts whose reputation and independence is untouchable. The committee blends well-established intellectual fortitude with appropriate demographics - several members are in the comfortable final stretch towards retirement, safe from the insecurities of future ambition.

The contrast with the ECB's ruling group is unhappy. Academic theory supporting central bank independence requires that bankers are secure from short-run temptation. In response, bond and foreign exchange markets allow interest rates to fall, a move that in turn over the cycle promotes greater growth in return for short-run restraint. But the theory, well supported by evidence over several decades, falls aside when bond traders no longer feel the bankers are operating independently. The game, as in commercial banking, is confidence. Without it, in practical terms, the bankers return to their status as a branch of government. Inflationary expectations return to former levels. No benefits accrue. The game is over.

The ECB has very little time now to obliterate the calamity of last weekend. Whereas theory insists that a bank governor be grave, conservative and low profile, the well-intentioned Wim Duisenberg begins his new job as a maligned pantaloon who has already made statements which strain credibility to the limit. In spinning the decision which will mean him stepping down halfway through his eight-year term, he said: "I want to emphasise that this .was my decision, and my decision alone, and it is entirely of my own free will, and mine alone, and not under pressure from anyone . . . in the future the decision to resign will be my decision alone." A few too many protests there. And why else would President Chirac have fought so hard for his man, Jean-Claude Trichet, if not to promote a level of political control over the bank? …