Thursday, June 19, 2003

ECB: Revolution in the Boardroom?

Apart from the disquieting legal background to M. Trichet's entry on the international banking scene, one other detail does seem worthy of note. The lack of discussion about what kind of policy impact he might have. This absence is all the more noteworthy in the light of the blaze of publicity and discussion which accompanied the change of watch at the Bank of Japan earlier this year. It is also noticable by its absence in the debate on deflation fighting, now that it appears some of the main European economies may be flirting with the 'Japanese' problem. Paul de Grauwe, academic economist, and Belgian nomination for membership of the ECB managemnet body, reflects on M Trichet's qualities in today's FT. As far as I can see he is expecting a personality clash with Otmar Issing (the ECB Chief Economist) and that Tricet will lean more towards capping inflation than fighting inflation. If this is the case the best that can be said is that we may be in for 'more of the same'.

Now that this uncertainty seems to have been is appropriate to ask what difference Mr Trichet would make at the helm of the ECB. The cynical answer is: very little. The ECB is not the US Federal Reserve, where the chairman is clearly in charge. The institutional structure of the eurozone system of central banks is very different. The national central bank governors exercise considerable influence over eurozone economic decision-making, and will continue to curtail the power of the ECB president. In addition, at present it is the chief economist of the ECB's governing council - not the president - who prepares its meetings and formulates the policy options that are to be discussed. In such an environment, the new president will have limited freedom to impose his views. For the cynics, the difference between Mr Trichet and Mr Duisenberg will amount to very little.

Yet strong individuals can sometimes make a difference. There can be little doubt that Mr Trichet will be a more forceful leader than Mr Duisenberg - which, according to some, will not really be difficult. He is likely to want to be more involved in the preparation of the governing council meetings and in the formulation of the policy options. A power struggle with the chief economist is therefore a strong possibility............

The start of the new presidency is an opportunity to define a strategy that comes closer to best practice and that will create less confusion..................Will this change in strategy also include raising the inflation target to, say, 2.5 per cent or 3 per cent? Many economists would welcome such an increase, especially at a time when some eurozone countries have structurally higher rates of inflation, and are therefore pushing other members dangerously close to the zero inflation limit, creating a deflationary bias in those countries. In addition, as the critics have argued, the maintenance of a target that says inflation should not exceed 2 per cent has led the ECB to react too slowly to growing recessionary pressures.

It is unclear whether Mr Trichet will want to change this part of the ECB's strategy. After all, he made his reputation forcing the rate of inflation in France down to the German level amid howls of protest from French politicians, economists and intellectuals. He stood firm and earned a reputation as a hard-nosed inflation fighter - quite a feat in France. Will he want to endanger this reputation by raising the inflation target? Or will he be the "Nixon who goes to China"? I expect that Mr Trichet will want to preserve his hard-fought reputation. But I may be wrong. Sometimes the quality of great leaders is to do the unexpected.
Source: Financial Times

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