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