Don't lay all the blame at poor Duisenberg's door

Click to follow
The Independent Online

The more serious problem lies with the ECB - where a new, more transparent structure must be developed

The more serious problem lies with the ECB - where a new, more transparent structure must be developed

Is it a Duisenberg problem, an ECB problem, or a eurozone economy problem?

Actually it is all three, but the first is the least important. The wobbly week at the European Central Bank gave rise to suggestions that its president may not survive for the four years that he is expected to serve and the endorsements of Wim Duisenberg were less than ecstatic. But the dire reputation of the ECB and the disturbing plight of the euro are not just functions of the behaviour of the ECB's current president. There is a natural instinct for people involved in markets to replace the chief executive if a company under-performs. But running a central bank is not like running a company: the position of president is not at all like that of a chief executive, while the levers of control in central banking are extremely indirect and their effect most uncertain.

The immediate criticism of Mr Duisenberg is that he has given unclear signals to the press about intervention policy. Of course it is better to say nothing, but the fact that the euro is back to its all-time lows this week is only superficially because Mr Duisenberg gave the impression that there would be no early intervention by the central banks to support it.

Giving a less-than-felicitous interview is not a hanging offence. There is a more fundamental criticism of Mr Duisenberg: that his leadership of the ECB board is weak. It is hard for outsiders to make a definitive judgement on that, though his ability to explain the policy of the board to outsiders has been fairly useless - as anyone who has seen him speak would testify. To bumble may be endearing when your success is assured, but it seems more like incompetent when your organisation is under pressure.

But arguably the perception of weak leadership is more a function of the make-up of the board, the sheer newness of the whole organisation and, naturally, the weakness of the euro, than any particular failings of the president. If things were going well, the critics would be silent.

The structure of the ECB is surely the more serious problem, or rather problems, for there are two of them. Problem one is the inherent difficulty of deciding on a "one-size-fits-all" interest rate policy. Whatever the board decides is going to be wrong for a large portion of the eurozone: that is the inevitable result of having a single interest rate for such a diverse region. Those strains are bound to be reflected at board level. So the management of the board is inherently more difficult than that of, say, the US Federal Reserve.

You can catch a feel for this by looking at the graph, which shows UK, US and eurozone interest rates for the past two decades (with German interest rates for the pre-euro period) in real terms. The main current criticism of the ECB is that, unlike the US, it has been too worried about inflation and failed to allow the European economy to grow fast enough. But is that really so? Look at US rates, and indeed UK ones, over the period. Actually the ECB, like the Bundesbank before it, has had a rather soft interest rate policy. Real interest rates are and have consistently been lower than those of the UK and US for 15 years.

The problem of the ECB is not that it has been too hawkish on rates, but that whatever it does, it is inevitably going to do the wrong thing for some parts of the region.

The second structural problem is the lack of transparency of the ECB. Now, you don't want too much transparency in central banking: I would not say that they should be able to create confusion, but they do need to create a bit of uncertainty. The ECB structure is modelled on that of the Bundesbank, which is pretty opaque even by central banking standards. But that works OK in Germany because the Bundesbank had developed a special authority of its own over the previous half century. The Bundesbank was an much a symbol of change in Germany as the Bonn republic. That legitimacy does not transpose over to the ECB.

So a new, more transparent structure has to be developed, so that the basis for decisions can be seen and approved. But that will take time because it is important to introduce modifications in a cautious way. Better to do nothing, at least in the short-run, than to have botched reforms.

But even were both the president and the structure of the ECB optimal, there would still be the fundamental problem of the euro. So much that has been written about this has proved utterly wrong that it is hard to be confident now. But I think we are beginning to understand what has been happening. It is that the relatively slow growth prospects for the eurozone vis-à-vis the US mean that there will tend to be a capital outflow from the eurozone to the US. This is likely to continue for the foreseeable future, for, if only for demographic reasons, the US seems likely to grow more quickly. The flow may not be as large as it has been during the past couple of years, and there will be periods when it reverses for a while. But as a long-term trend for the next couple of decades, this flow seems likely to continue.

The result will be that the euro will tend to be weak. There will be periods of modest weakness and periods of extreme weakness, such as now. There will also be recoveries, for nothing in the markets ever heads in one direction for ever and markets tend to overshoot. But unlike the mark, the euro is unlikely to be inherently strong.

There is nothing that the ECB can do about this. Central banks do not control currencies. They do not control growth rates They do not control the rate of structural change nor the rates at which new technologies are adopted. All they can do is to have a strong influence over inflation. Meanwhile, it would be both more rational and more fair to blame the eurozone politicians for the under-performance of the eurozone economy than to blame the hapless Mr Duisenberg for the poor performance of the euro.

Comments