City & Business: Eddie needs a result from his first test
Sunday 01 June 1997
The MPC, you will recall, is the mechanism by which the Bank of England will set interest rates as part of the operational independence it was granted by the Government last month. The problem is that the nine-man committee so far only has three-and-a-half members. The Governor, Eddie George, and two key Bank lieutenants are in place, but deputy governor Howard Davies will be leaving the Bank shortly to head a beefed-up Securities and Investments Board. The Government is expected to name the four new outside members of the committee this week, which will still leave it light of a second deputy governor and a replacement for Mr Davies.
It is unlikely that the four new appointees will be in place in time for Thursday's MPC meeting, but that will not stop it going ahead nor will it interfere with a robust debate of interest-rate policy. Those who believe the committee will be prone to inertia in its formative weeks are misguided. As far as the Bank is concerned, this is an official meeting and if the committee accepts that a quarter-point rate rise is required then one will be sanctioned.
The Bank has already hinted that a small rise is needed if the Government's 2.5 per cent target inflation is to be met. However, although the meeting is likely to consist of only four Bank executives and a Treasury representative this does not mean the committee will just rubber stamp the stated Bank view and order a rate rise. It is quite apparent that Mr George intends to take his responsibility as chairman seriously. He is not going to squander the opportunity the Bank has been given with an ill-considered first decision. The debate will be rigorous and comprehensive as the minutes will show when they are published six weeks later. Whatever is decided will stand the test of the most vigorous analysis.
What will come through most clearly from the minutes of this week's meeting and those in the months ahead is the importance of Mr George's role as chairman of the MPC. My guess is that he will try and avoid a monthly vote and instead lead the meetings towards consensus. A consensus decision will always carry much more authority with the markets than one based on a split vote. But that consenus will only be achieved by an authoritative and respected chairman. Mr George fits the bill perfectly, and this represents another powerful argument for why he must be reappointed as Governor next year.
For while Chancellor Gordon Brown rightly won plaudits for the bold move to give the Bank responsibility for setting interest rates, the real test is how the MPC works in practice. Sustained credibility for Mr Brown will come from the sustained credibility of the MPC. In this respect, Mr George is not just an asset but an ally.
EMU's credibility gap
IF TODAY'S final round of the French election delivers a socialist government, it will erode yet further the credibility of the increasingly incredible European Monetary Union. Like their right-wing opponents, the Socialists will sign up for the first wave of EMU, scheduled for 1999. However, their commitment to meeting the convergence criteria is virtually non-existent - hardly surprising after Germany's blatant attempt at creative accounting.
Given that France and Germany were supposed to be the anchors of a single currency, their desperate manoeuvrings to meet the Maastricht criteria look all the more pathetic. The time has come to put the wretched project out of its misery and pronounce a delay - an idea that Bundesbank president Hans Tietmeyer appears to endorse.
To carry on this pretence that EMU is some panacea to European economic mismanagement is a quite ludicrous charade. A weak EMU is a dangerous EMU, which if allowed to proceed with the fantasy finances of the member countries will create long-term economic problems that will take years to unravel.
One big problem with the single currency as currently proposed is that membership relies too much on the letter rather than the spirit of the Maastricht convergence criteria. To have any sustainable future, a single currency must be based on member countries who have a clear long-term commitment to economic prudence rather than clever one-off compliance with the entry rules.
In short, it has to be rethought and that will require a delay. The sooner this is accepted, the sooner EMU can be reconstructed in a fashion that will allow it to deliver the promised economic stability.
Rough ride for Warner
OUR front-page story that Warner Brothers and United News and Media have been forced to pull out of their proposed pounds 225m Movie World theme park in north-west London is little short of tragic. The opportunity to create over 4,000 jobs and generate significant economic wealth has been lost almost by accident.
Such a valuable prize would not have been allowed to slip away if the park was being built in France. I remember a few years ago noting the contrast between the French and British attitudes to a planned theme park that Rank and Universal Studios had wanted to build. The French were offering to build a railway station at the proposed site on their side of the Channel and had an array of subsidies and tax breaks available. The rival British site could only offer a lengthy public inquiry. Rank wanted to build the park in Britain but the different attitudes made it hard to exploit their patriotism. The recession killed the project, but the point is still well made.
Thankfully Warner and UNM and now looking for another site. When they find it, they must not be subjected to the same frustration.
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