Small Is Big.
One widely expected result of European Monetary Union was the diminution of the power and influence of the German central bank--the Bundesbank--in European, indeed, in world monetary affairs. For much of the post-World War II period, the Bundesbank played the role of Europe's de facto central bank. With the establishment of the European Central Bank, however, the Bundesbank became one, though one with a very special past, of the many national central banks participating in European Monetary Union.
What was not foreseen about EMU, however, was its effect in increasing the power and influence of the smaller national central banks in the formulation of European monetary policy. In effect, EMU established a "one man, one vote" system in the European Central Bank's Governing Council. If the head of a national central bank has the right arguments, can persuade others, and is a good coalition builder, he can have great influence in the Governing Council, even if he represents a small country.
There are several present examples. The Austrian central bank, the Finish central bank, even the Portuguese central bank have influence disproportionate to the size of their economies. But the most striking example of a small country that yields great influence in the ECB's Governing Council is the Netherlands. When I asked a senior European central banker to name the most influential members of the Governing Council, Nout Wellink, president of the Nederlandsche Bank, came close to the top of the list.
The case of the ECB's euro policy is illustrative of current Dutch influence. The ECB did not have an explicit strong currency policy at the outset. Rather its euro policy was one of "benign neglect." When the euro started to tumble on foreign exchange markets, however, "benign neglect" took on the look of a "weak" euro policy to some. Pronouncements by various European politicians (including German Chancellor Gerhard Schroeder) that the weak euro was good for European exports did not help.
The Dutch have a tradition of a strong currency. Their argument that benign neglect be abandoned was instrumental in changing the currency policy. Today, thanks to their persuasive view, the ECB finally has adopted a strong euro policy, though it has no explicit exchange rate targets.
Several factors account for the ascendancy of Dutch influence in Frankfurt. It undoubtedly helps, of course, that Wellink has had a long and close working relationship with ECB president Wim Duisenberg, who was Wellink's immediate predecessor at the Dutch central bank.
Nurtured by such distinguished past central bank chiefs as Marius Holtrop, Jelle Zijlstra, and Duisenberg, the Dutch central bank has a long tradition of independence from outside political influences, a longer time horizon for policy, and a proclivity for strong anti-inflationary policies and a hard currency. This is exactly the kind of influence the fledgling European Central Bank needs, and exactly the type the old Bundesbank used to provide.
What also helps give the Dutch a voice that counts in the Governing Council is the outstanding economic performance in Holland. In a recent interview, Wellink concurred that the success of the Dutch Model--reduced social spending, flexible labor markets, and decentralized economic decision-making--had not been irrelevant to Dutch influence in Frankfurt. "It's easy to give advice," said Wellink. "But would they listen if we didn't have the economic success?"
In a "one man, one vote" system, however, having good arguments and being persuasive may not be enough to win the day. One also has to be a good coalition builder who can enlist powerful allies on your side. The Dutch have been very skillful at this as well.
Outside of Duisenberg, the most powerful figure in the Governing Council is Jean-Claude Trichet, president of the Bank of France. Notwithstanding some important differences with the French government over issues such as tax harmonization, the Dutch have been able to forge a coalition with the French central bank because Wellink and Trichet see eye-to-eye on the principles and objectives of the ECB. Both men favor strong anti-inflationary policies and a hard euro. It also helps that Trichet is a big fan of the Dutch Model of economic flexibility and a moderated welfare state. Given that Trichet is slated to be Duisenberg's successor as ECB president, the Dutch coalition with the French clearly is a coalition of influence.
The Dutch also have been quite skillful in distancing themselves from the Germans. There was, of course, no way the Bundesbank could have escaped a sharp diminution of its power as a result of EMU. But the fall in the influence of the once-dominant German central bank has been magnified both by the weak German economy--the weakest of the core euro-zone economies, at present--and unwise attacks on what had been Germany's most prestigious institution by the current German finance minister, Hans Eichel.
Eichel has done some fine things in his almost two years at the helm of the ministry, but his proposal to strip the Bundesbank of its supervisory functions in Germany's banking, insurance, and securities markets is a serious mistake. First, it undermines the effectiveness of the supervisory process inside Germany. The experienced Bundesbank will be a more diligent overseer of Germany's financial markets than some neophyte agency. From a European perspective, decreasing the importance of the Bundesbank at home can only decrease the importance of the Bundesbank, and ergo Germany, in the ECB's Governing Council.
An effective counter-attack to Eichel's wrongheaded campaign to humble the Bundesbank is badly needed. Observers are hoping that the German central bank's current president, Ernst Welteke, will spearhead the effort to maintain the Bubba's legendary tradition of independence and prestige.
Notwithstanding the Bundesbank's current problems, it is likely the Dutch would have sought to distance themselves from the German central bank in any event. The notion that the Nederlandsche Bank is merely a surrogate of the Bubba persists to this day, even in the Netherlands. This always was an exaggeration according to Wellink. "The old Bundesbank, for all its power, was isolated and needed friends," he claimed. Add to this the Bundesbank's current woes, and the Dutch strategy of gaining influence by moving away from the Germans and towards the French makes perfect sense.
While European Monetary Union's "one man, one vote" system has resulted in a dramatic re-distribution of power and influence among the various national central banks of Europe, the question arises, however, whether such a power shift will produce any truly important changes in European monetary policy from the days when the old Bundesbank played central banker for most of Europe. The players are different, it is true, and there is, of course, the euro. But the ruling coalition in the ECB's Governing Council today reflects the same principles and values that motivated the Bundesbank when it was led by the likes of Karl Otto Pohl, Helmut Schlesinger, and Hans Tietmeyer--a strong anti-inflation policy, independence from outside political influences, a longer time horizon for policy, and a hard currency. (The one direct link between the old Bundesbank and the new European Central Bank is Ottmar Issing, who was a member of the Directorate and chief economist of the Bubba before he became Directorate member and chief economist of the ECB.)
Like the old Bundesbank before it, the new European Central Bank under the tested Wim Duisenberg knows what the right thing to do is, and can be expected to act upon it. In time, scholars will come to recognize that one of European Monetary Union's major and least expected effects was to give smaller nations a chance to yield greater influence.
Melvyn Krauss is a Senior Fellow at the Hoover Institution.
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|Title Annotation:||European Monetary Union|
|Publication:||The International Economy|
|Date:||Mar 1, 2001|
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