A central banker’s unnoticed revelations

Discussions, such as those on what the chief role of the European Central Bank (ECB) should be, can seem to have a little in common with the interminable dogmatic debates by the wise men in the Middle Ages. Nevertheless, they have particular significance if translated into simple Greek, that is, into interest-rate policy and, indirectly, into euro-dollar parity. Bank of Greece Governor Lukas Papademos’s recent comments in an interview with Reuters may have gone largely unnoticed in Greece, but not in European capital market centers. He said that while the ECB’s overriding aim was to guard against inflation as, naturally enough, everyone knows, it was not its only aim. Price stability is the primary object of the European Central Bank, and it should be, he said. Having said that, I would like to note that it is not, as is occasionally remarked, the only objective. According to the ECB Charter and provisions in the treaties that established Economic and Monetary Union (EMU), once price stability is assured, the Frankfurt bankers must look beyond to the more general economic situation in the eurozone. This is indeed the situation today. Inflation is de-escalating. Analysts estimate that the annual rate of inflation in October will be around 2.4 percent, in other words, quite near the 2-percent target which the ECB has set as the equilibrium point for an economy without inflationary pressures. According to the ECB’s latest monthly bulletin, inflation will be under control early in 2002, earlier than previously projected, with the proviso that favorable conditions regarding oil prices and the unfavorable developments concerning a shortfall in the economy’s growth rates have not been reversed by then. Papademos revealed that, besides inflation, the Eurobankers have also frequently discussed recently the other variables which affect policy on euro interest rates. They had at least one important reason for doing so: ECB analysts, they admitted, had been wrong in their estimates on the size, duration, and, therefore the repercussions of the recession in the US on the European economy. While taking into account the economy’s general state, Eurobankers will only with difficulty admit in public they are influenced by the conclusions which laymen can arrive at. This attitude is part of the peculiar dogmatism which prevails among all central bankers. The fear of destructive inflation is deeply embedded in their consciousness. That Papademos felt he could make such observations is not due to his post of adviser to the US Federal Reserve during his academic career on the other side of the Atlantic, nor to his friendship with Alan Greenspan. What obviously weighed with him is his desire to give notice of the Greek vote on the ECB Council, with due latitude for the independence which must characterize his personal, as opposed to nationally expedient opinion on the most appropriate interest-rate policy for the eurozone. No one will deny that ECB is a young central bank and cannot be vouched for in consistency and effectiveness like the Fed, particularly after the tenures of Paul Volcker and Greenspan. Nor has it exactly inherited the virtues of the Bundesbank, which managed to consolidate the traditional confidence which Germans had in their currency. The ECB’s basic problems, Papademos correctly pointed out, are the poor communications between its top officials and the politically appointed members of the Economy and Finance Ministers Council (ECOFIN). As the threat of even a mild recession in the European economy looms, the situation seems incomprehensible. The bankers remain silent while carefully reducing interest rates and condemning even a minute fiscal relaxation. Ministers, on the other hand, refuse to promote structural changes and resort to sniping to nudge for laxer interest rates. Political pressure does not help, noted Papademos. When such views take the form of direct recommendations on monetary policy, they may complicate the decision-making of the European Central Bank. Consequently, if there are no more clashes in the next few days, the ECB Council’s next session on Thursday could decide to trim the basic interest rate for the euro by a quarter, and possibly half a percentage point. There has to be realism in a program. It’s no use rushing ahead with a program that is too ambitious, particularly in the present situation where Bulgaria is also affected by what is becoming a real (world) recession, he said.