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Willem Buiter on the ideal European Central Bank

The future of Europe is at stake. Yesterday, the European commission published a Roadmap for deepening Europe’s Economic and Monetary Union. coincidentally, the German Handelsblatt ‘EZB Schattenrat’ (‘ECB shadow council’, of which I’m a member) today discussed the ideal European Central Bank. The coming days I will post some (written) remarks made by members of the shadow council as well as some stuff relating to the Roadmap. No mention will be made of individual verbal remarks. Recurring themes were however the tension between centralization and decentralization, the inadequacy of pure inflation targeting (but what has to come next?), the importance of financial stability, the wish that some kind of ECB prosperity mandate has to become more explicit and the need for accountability. Today: written remarks by Willem Buiter:

The ideal central bank of the future

1. The ECB should have financial stability as its overriding target. Subject to that it should target price stability and full employment.

2. The NCBs [national central banks, M.K.] in the euro area should be phased out. They could become branches of the ECB, but that would still leave too many ‘regional branches’. The operational implementation of the monetary and financial stability policies can be decentralized, but with no more than 12 regional branches. These regional coverage of these 12 branches need not coincide with any national territories. The total number of Governing Council members should be capped at 18. The six Board members would be selected by the Council and confirmed by the European Parliament. The (up to) 12 further GC members need not be the heads of the (up to) 12 regional branches. They could be selected through a number of different mechanisms.

3. There would be full profit and loss (“risk”) pooling/sharing between the ECB and the 12 regional branches. All ‘own risk’ activities, assets and liabilities should be phased out asp.

4. Article 123 should be revoked. The ECB should be able to fund sovereigns directly, at its sole discretion. [i.e money printing to fund governments, M.K.]

5. Foreign exchange rate intervention decisions and all actions targeted at the exchange rate except for a material change in the exchange rate regime should be the responsibility of the ECB alone, without any role for the national governments or a possible future Eurozone finance minister.

6. The ECB should not be the leading banking sector supervisor/regulator. Supervisory and regulatory leadership should belong to the EBA, with the ECB in a supportive but subordinate role.

7. All members of the Governing Council should be called upon to testify/give evidence regularly before the European Parliament or ECON.

8. Only the President of the ECB should communicate about central bank policy with the wider public and markets.

9. There should be a vote on every monetary, credit and financial stability decision by the Governing Council. The individual votes should be in the public domain immediately. Individual members can explain each of their votes in writing, within 24 hours of the vote being taken, with the explanations released to the public immediately.

10. There is no central bank that is a role model for such changes, because there is nothing a crazy as the Eurosystem today, and all changes recommended here are constrained by these unfortunate initial conditions.

Mit freundlichen Grüßen Willem Buiter Citigroup Global Markets Inc., New York

  1. December 8, 2017 at 2:25 am

    The ECB prosperity mandate, principle one?

    1. The ECB should have financial stability as its overriding target. Subject to that it should target price stability and full employment.

    Sounds a lot like the U.S. CB’s “dual mandate” to pursue both price stability and maximum employment. The problem with the Fed’s mandate is how it’s been interpreted by the Fed’s Board of Governors.

    The Fed has always chosen to interpret it as an instruction to optimize employment, but only up to the point when that goal seems to be threatened by the superior goal of price stability.

    A far more rational interpretation in the best interests of society as a whole would be that the CB should pursue the goal of price stability, but only up to the point when that goal seems to be threatened by the superior goal of full employment.

  2. Julian Wells
    December 9, 2017 at 3:32 pm

    Despite the social undesirability of the ECB having “financial stability as its overriding target” as opposed to promoting employment there’s the question of its feasibility (and — from the capitalist point of view — its desirability).

    As Marx and numerous others have pointed out, financial crisis is inherent in capitalism. Apart from Marx, few seem to have identified financial crisis as a necessary mechanism for overcoming crisis on a capitalist basis.

    Thus Buiter et tutti quanti are capitalist utopians if they think such event can or should be prevented. (From a democratic point of view they are profoundly dystopian, as explicitly revealed by his points (1) to (5) and implied by the remainder.)

    There are of course non-capitalist solutions to capitalist crisis, but they are somewhat different in character.

  3. nicholbrummer
    December 10, 2017 at 12:19 am

    The role of the Eurogroup is now totally disfunctional. Making it more transparent, and under democratic control, seems a reasonable demand. Would it also help make monetary policy of the ECB more sensible and effective?

  4. December 13, 2017 at 5:36 pm

    It seems to me that as more and more national sovereignty is being eroded from European countries and concentrated in one central bank that it has the makings of a financial dictatorship. Really? Is that the way to go for democracy? Maybe Brexit was not such a bad idea.

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