Manual Banking on Sterling: Britains Independence from the Euro Zone

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Furthermore, the ECB is forbidden by its founding charter to balance the goal of price stability against other aims such as growth and job creation. The ECB's architects at Maastricht sought to insulate it completely from political pressures, both at the national government and at the EMU-zone level.

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By contrast, the US Federal Reserve, for instance, is required to take into account output and employment objectives alongside inflation targets, whilst being subject to fierce, regular scrutiny by Congressional committees with wide powers of investigation and review. It stipulates that the ECB Council's deliberations remain confidential, although Wim Duisenberg, the ECB's President, suggested that minutes of Council meetings could be made public after a time lag of sixteen years! The only method of questioning the ECB's policies is through periodic reports to the ineffective European Parliament.

Consequently, in an EU structure of decision-making widely acknowledged to be suffering from a 'democratic deficit', the powers handed to an unaccountable ECB will exacerbate the shortcoming. In Britain, the USA, Canada, Australia and a growing number of smaller countries, monetary policy is used to control both inflation and unemployment by managing aggregate demand. By contrast, within Euroland any suggestion that monetary policy could be used to increase living standards and reduce unemployment is a heresy not to be contemplated.

The ECB's legal responsibility is to maintain price stability, but that target has not been attained in France and Germany for the past five years. However, the ECB consistently ignores the success of the UK and the USA in achieving low inflation, whilst simultaneously deploying monetary policy to reduce unemployment. The explanation of this conundrum lies in the ECB's origins and the macroeconomic theory it has adopted. From its monetarist background, the ECB argues that the majority of Euroland's historically high unemployment currently around seventeen million originates from structural deficiencies on the supply side of its member states economies.

Consequently it denies responsibility for increasing aggregate demand to lower unemployment, believing that there is no further room for expansion in the Euro economies. In support of this thesis, another impeccably orthodox economic institution, the OECD, has published estimates for the natural rate of unemployment, below which inflation is believed to accelerate, for all industrialised economies. On this reasoning, no scope exists to reduce unemployment without accelerating inflation. Such a view emphasises the grip that the natural rate of unemployment hypothesis exerts over ECB policy makers.

Contemporary EMU monetary policy is dominated by the view that inflation inevitably increases once unemployment falls below a critical level the non-accelerating rate of unemployment. Therefore the focus of monetary policy becomes to ensure, in practise, that unemployment is sufficiently high to reduce price and wage increases. This theory is the clue to ECB strategy. However, if the sole objective of policy is to maintain a constant rate of inflation, wide variations in output and employment may be required.

In so far as a potential conflict exists between steady inflation and full employment, the latter should enjoy priority, because the consequences of fluctuation in employment are more serious than those in the rate of inflation. Apart from the human costs of lower income, job insecurity, loss of skills, poorer mental and physical health, and higher crime rates, the industrial cost is enormous, since lost capacity cannot subsequently be made good when demand recovers.

These problems do not deflect Europe's establishment from its objectives. Its autonomy vis-"-vis national governments and the EU institutions, which results from an international treaty, is more soundly guaranteed than anywhere else in the world We have clearly enshrined in our treaty a fiscal policy that emphasises the need for fiscal responsibility and we have drafted secondary legislation that will make sure that member states will deliver on this commitment". On the change from an international economy dominated by the fear of inflation, when the Maastricht Treaty was signed in , to today's deflationary climate, Strauss-Kahn remarked: "Our task is to make this system work in a context which is clearly different from the one the architects of Maastricht had in mind when they drafted the Treaty".

The more effective alternative of changing the policy decision-making framework as circumstances change is self-evidently not on the agenda. Strauss-Kahn does, however, accept the "need for institutions that can deliver effective co-ordination between the eleven governments of the euro-zone, and between them and the independent ECB", because "in the absence of effective co-ordination, doubts about the other players might well lead the euro-zone to adopt a less than optimal policy-mix". However, difficulties arise when Strauss-Kahn claims that "the efforts made since the late s have created conditions for a long EU cycle of growth".

Such a claim flies in the face of all the evidence; the EU was a low growth area over the last decade, when these 'efforts' were undertaken, expanding at 1. Consequently unemployment in the EU was 5 million in , 14 million in 2 and is now nearly 19 million. Similar increases have not occurred in other OECD countries. Nonetheless the ECB's monthly bulletin of February asserted that monetary and fiscal conditions "are favourable for sustained output and employment growth in the euro-zone in line with price-stability" ECB, The ECB has consistently said that it would have to see clear signs of deflation before reducing interest rates.

However, Robin Aspinall, chief European economist at National Australia Bank, argued on 16th February that, "the ECB will have to cut rates eventually because there is no sign of any inflationary danger. However, the ECB is resisting a cut because it distrusts the fiscal discipline of Europe's politicians. The ECB also that interest rate cuts will not have much effect on unemployment. It favours structural reform to reduce unemployment" The Times, 17th February Therefore an unaccountable institution has assigned itself an exacting inflationary goal, with ramifications for other dimensions of economic policy.

Furthermore, the ECB argues that Germany's current troubles are structural not cyclical, but even if correct, embarking upon structural change and realising its results, is a lengthy process. However, distancing itself from democratic demands to emphasise its independence is a crucial tactic for building ECB credibility. Following the Second World War, British economic policy was directed to the simultaneous attainment of four policy objectives; high levels of employment, stable prices, balance of payments equilibrium and an expanding economy.

Within Euroland, responsibility for the second lies solely with the ECB, whilst the other three remain with national governments. An obvious danger is that economic management will become more difficult through the separation of budgetary and monetary policy. It was demonstrated by the shortcomings of the Reagan-Volcker era in the USA and Germany's problems following reunification; in both cases lax fiscal policy resulted in high interest rates. By contrast, with a non-independent central bank, budgetary and monetary management can complement each other, forging a co-ordinated strategy of economic management.

Since the EU Heads of Government met at Maastricht in to finalise the blueprint for EMU, their political complexion has changed beyond recognition. The centre-left now controls or shares power in thirteen of the fifteen EU governments, Ireland and Spain being the exceptions. The majority won elections by promising job creation. Therefore a new European consensus is emerging which prioritises the need to reduce unemployment. Consequently the theoretical possibility of a division between the conduct of budgetary and monetary policy has become a reality within months of the launch of the euro, far more rapidly than even sceptics anticipated.

A crevasse has opened up between centre-left governments focusing upon unemployment and the ECB operating from a monetarist, natural rate of unemployment perspective. Moreover, the bankers insisted in advance, via the Stability and Growth Pact, that governments should be deprived of the ability to spend their way out of recessions.

The battle between the ECB and European politicians was thrown into sharp focus by the resignation of Oscar Lafontaine. However, the underlying structural conflicts within Euroland lie deeper then the career of any individual, so that the danger of divisions between fiscal and monetary policies remains. Moreover, the gloomy economic prospects for the EMU-zone ensure that such pressures will intensify; for instance, the German economy contracted by 0. The euro countries, even without the UK, do not constitute an optimum currency area see Baimbridge et al.

Consequently for many years to come, persistent national divergences in growth and unemployment are likely to recur. This nightmare scenario has not taken long to unfold; Wim Duisenberg felt obliged to concede on 4th March that the economies so painfully corseted together by meeting the convergence criteria are already diverging The Times, 6th March While Ireland appears likely to overheat due to large reductions in interest rates at a time of unprecedented high growth, Germany appears to be drifting ineluctably into recession. Whatever happens in the future, it is plain that one key argument of the eurosceptics is correct; no single interest rate is suitable for the euro-zone.

Therefore any action of the ECB will cause trouble for some parts of Euroland, whose economies are destined to diverge over the foreseeable future. Thus, in the last quarter of , Germany's GDP fell by 0. Such sharp divergences in economic performance will make the ECB's stewardship a difficult task. The weight of theoretical and empirical evidence surveyed in this paper suggests that, the creation of an independent central bank in an established national economy, is an enterprise with certain costs and with only dubious prospects of the anti-inflationary benefits so frequently claimed.

To transpose such a hazardous undertaking to a supranational framework such as the EU, whose constituent national economies experience varying economic cycles and possess divergent economic structures, is fraught with difficulties. The decisions taken by the ECB are amongst the most sensitive actions deployed in a modern economy. Determining interest rates influences the growth of living standards, the level of unemployment and the amount that people pay for their credit and their mortgages.

However, nobody votes for the ECB, which is unaccountable for its actions. It does not publish its forecasts nor the minutes of its deliberations. Therefore the move to ECB control reduces the amount of democracy, increasing disillusionment and grievance with democratic institutions. The ECB's problems arise from its lack of democratic accountability, its arbitrary objectives, its outdated economic philosophy, and its potential for intermittent conflict with the national governments whose destinies it possesses considerable influence over.

Therefore the ECB as currently constituted is an anti-democratic, economically inept institution. Its lack of accountability, transparency and democratic legitimacy makes clear that no British government concerned for the efficiency of the UK economy and capacity for self-governance could submit to the ECB's monetary authority. Therefore it is crucial that the British people, if and when consulted, steer clear of this ill-defined, bureaucratic nightmare. Alesina, A. Baimbridge, M. Blackburn, K. Blake, A. Bodart, V. Breton, A. Brown, A. Buiter, W. Burdekin, R. K, and Willett, T.

Busch, A. Cukierman, A. Davidson, P. Dowd, K. Eijffinger, S. Evans, L. Fair, D. Frey, B. Friedman, M. In search of a monetary constitution, Harvard University Press, Boston. Grilli, V. Hansson, A. Hetzel, R. Hopkin, B and Wass, D. Kalecki, M. Karanassou, M. MacRae, C. Madsen, J. Mangano, G. Marsh, D. Miles, D. Mitchell, A. Muscatelli, V. Nickell, S. Nordhaus, W. Phelps, E. Posen, A. Finance and the international economy; 7, Oxford University Press, Oxford.

Rogoff, K. Stanners, W. Strauss-Kahn, D. Swinburne, M. Taylor, M. Thirlwall, A. Toniolo, G. Wagner, R. Wood, A. He co-authored What really means: single market or double cross? He has published over articles, primarily concerning Britain's relationship with the EU, in learned and current affairs journals in economics, politics and social policy. In addition to the economics of European integration, his research interests include trade unions, higher education, economics of professional sports and intra-political activity.

He wrote two widely quoted reports, Britain and the European Economic Community: an economic re-appraisal, and Britain and the European Economic Community: a political re-appraisal at the time of the referendum on EEC membership. He is also author of Trade unions and wages and , Trade unions and the economy , Radical political economy and over articles in learned journals.

He has previously co-authored What really means: single market or double cross? He is a frequent contributor, and commentator on economic issues, to television and radio programmes, including Newsnight and A Week in Politics. He co-authored There is an alternative and A price not worth paying: the economic cost of EMU He has published widely in learned journals and a number of policy papers, including submissions to the House of Lords Select Committee on The European Communities and the House of Commons Treasury Select Committee His research interests include the impact of European integration upon labour markets, fiscal federalism, international monetary developments and the UK's future relationship with the EU.

In addition, he has written extensively on the economic development of Sweden. Their edited collection The impact of the Euro: debating Britain's choice will be published by Macmillan later this year, whilst Britain and Europe: the great divide by Dr. Baimbridge and Dr. Burkitt will be published by Pinter next year. Theory, evidence and consequences, Occasional Paper No. The major focus of this research is directed towards the development of the EU with respect to economic and monetary union and a key objective of EERU is the dissemination of its research output to the widest possible audience.

EERU can be contacted at:. You need JavaScript enabled to view it.

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E-mail: This email address is being protected from spambots. The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state. The Bank that rules Europe? Paper No. The Meaning of Independence The concept of 'independence' is generally perceived to be obvious; it means simply that the government possesses no formal mechanism to influence central bank decisions over monetary policy Wood, Models of Independence Alternative forms of central bank independence are as numerous as the number of 'independent' central banks; the memoranda submitted by nineteen OECD central banks to the Treasury and Civil Service Committee provide abundant evidence.

Issues in Central Bank Independence The conceptual case for central bank independence is primarily based on the view that arrangements which raise the credibility of monetary policy will increase its effectiveness in pursuit of price stability. Difficulties of Measuring Independence When assessing the impact of central bank independence upon price stability economists have mostly utilised imputed 'degrees of independence' to evaluate the heterogeneous character of central banks.

The main failings are: A limited spread of rankings inevitably restricts sensitivity across a wide number of inherently different countries, which raises difficulties concerning the index's analytical usefulness. Empirical Analysis of Central Bank Independence In this section we examine the issue of central bank independence within those EU members states excluding Luxembourg which at the time did not possess its own central bank , who were original signatories to the Maastricht Treaty.

Table 1: Correlation between central bank independence and macroeconomic variables for EU member states Indicator of central bank independence: Rate of inflation GDP growth Governor not appointed by government 0. The ECB and Contemporary Political Reality The ECB, which started running the monetary policy of the eleven countries adopting the euro on January 1st , is a creation of the Maastricht Treaty, which designed it to be the most independent monetary authority in the world.

Conclusion The weight of theoretical and empirical evidence surveyed in this paper suggests that, the creation of an independent central bank in an established national economy, is an enterprise with certain costs and with only dubious prospects of the anti-inflationary benefits so frequently claimed. References Alesina, A. Authors Dr. Contact us Director : Robert Oulds Tel: Email: info brugesgroup.

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