Advertisement
  1. Archive

FEDERAL RESERVE CAN'T BEHAVE LIKE COUNTERPART IN EUROPE

Contrasts between the Federal Reserve and the European Central Bank are striking, and not just because the ECB has raised interest rates five times in the past year while the Fed has been on hold.

Last week, for instance, Fed chairman Ben Bernanke was questioned at two hearings by dozens of members of Congress who, should they choose, have the power to give him and his colleagues marching orders on monetary policy. The Fed, after all, is part of the congressional branch.

Meanwhile in Europe, ECB president Jean-Claude Trichet rebuked newly elected French President Nicolas Sarkozy for seeking a greater voice for European governments in setting monetary policy.

Sarkozy is unhappy because the ECB interest rate increases have helped push the value of the euro to a record high.

In particular, Sarkozy has criticized the ECB's single-minded focus on price stability. The Fed, on the other hand, has a dual legal mandate to achieve stable prices and maximum sustainable employment.

Whatever the French complaint, Trichet was on solid legal ground in telling Sarkozy off.

The ECB, as its Web site says, has "constitutional" status. That is, it was created by the treaty establishing the European Community, which set price stability as the bank's primary goal.

Provisions of the treaty and a statute covering the European System of Central Banks ban the ECB and the separate central banks of the 27 EC-member countries and the "members of their decision-making bodies from seeking or taking instructions from Community institutions or bodies, from any government of a member state or from any other body."

Central bank independence clearly is a good thing, but the combination of the primary goal of price stability, absolute independence for the ECB and, in effect, a gag rule on democratically elected leaders regarding monetary policy seems to go a bit too far.

When Trichet holds a press conference immediately after each of the ECB monthly policymaking sessions, he makes a lengthy introductory statement explaining whatever decision has been made. He then takes questions from reporters.

What he doesn't do is to mention any dissenting views. And there can't be any dissenting votes because no votes are taken. Nor are minutes ever released.

Again, in contrast, the Federal Open Market Committee released minutes of its June 27-28 meeting on July 19. The vote to make no change in its 5.25 percent target for the overnight lending rate was unanimous. The FOMC minutes don't identify which participants express which views. When there is a dissenting vote, though, the official casting it is identified.

Making monetary policy in a democratic society is a tricky business. A central bank should be independent and accountable, and the ECB Web site agrees.

But hiding dissenting views and never having votes leaves a big hole in that accountability.

YOU MIGHT ALSO LIKE

Advertisement
Advertisement