View from City Road: French culture may fetter independent bank

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The French government's proposals yesterday to make the Banque de France independent mark another step on the road to a single currency with Germany. Under the Maastricht treaty, every member state intending to participate in the monetary union must give its central bank independent control over monetary policy - interest rates - during the 1994-7 second stage.

France, determined to prove itself as enthusiastic about sound money as Germany, has accelerated the process. If the markets come to be impressed by the incorruptibility of France's monetary guardians, it is even possible that the franc could become the most sought-after currency in the exchange rate mechanism. Other countries would have to pay a premium over French interest rates to persuade investors to hold their currencies. The new Banque would have assumed the Bundesbank's mantle.

The French central bank will pursue price stability within the framework of government policy, almost exactly the same formulation as in the Bundesbankgesetz and implying the same conflicts as those that arise between Bonn and Frankfurt. Paris, like Bonn, will retain control over exchange rate policy and the reserves. But the bank will not be able to ask for or accept instructions from the government or anyone else: this gives it control over interest rates.

The monetary policy committee will comprise the governor and two deputy governors, each with six-year terms. There will be six other members nominated by the government, but only from a shortlist of 18 drawn up by institutions like parliament and the judiciary. To ensure that they remain above government influence, they will have non-renewable nine- year contracts and can be sacked only for gross misdemeanours.

There can be few cavils with these plans. It would be preferable to remove responsibility for banking supervision to a separate agency, as in Germany and the United States. There can be a conflict between the objective of a sound banking system and the pursuit of lower inflation. But this is a detail. Edmond Alphandery, the Economics Minister, is a true believer in central bank independence, and has not been half-hearted.

However, that does not mean that the Banque de France will rapidly acquire the Bundesbank's credibility. The proposed monetary policy committee is entirely Paris-oriented and centralised. By contrast, the Bundesbank council draws much of its prestige from its curmudgeonly backwoodsmen, the Landesbank presidents, who are quite able to tell the Frankfurt secretariat where to get off.

There is also the biggest question of all: is a change in the law enough? Will monetary policy decisions made by French people really be as tough as those made by Germans? A central bank is inevitably a creature of its culture. Germany's inter-war history of hyperinflation means that the Bundesbank has always had strong public support for its anti-inflation stance. France's newly independent central bankers may find the French much more of a handful.

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