In Washington: The people versus Eurofed

CENTRAL banks have always been convenient scapegoats in times of economic stress. We saw this last week, as the Bundesbank became a black shadow haunting the annual meetings of the International Monetary Fund and the World Bank. It was blamed for a whole litany of woes: exporting crippling high interest rates, plunging Europe into recession and the exchange rate crisis that shook Britain and the world.

Yet the real issue in the current debate is not the behaviour of one or more central banks, but whether or not they should be independent. This was the root cause of Denmark's rejection of the Maastricht treaty and the closeness of France's 'yes' vote. In both referendums, voters reacted to the spectre of a Bundesbank writ large, arrogantly determining the economic fate of the whole of Europe after monetary union.

Is this a fair comparison? Although both the Bundesbank and the US Federal Reserve Board act independently, neither is completely free of the domestic political process. This is an important point to pursue in the debate over how to proceed with European monetary union after the clear defeats last week. I am reminded of the prescient remarks last May of Richard Cooper, a Harvard professor, who saw as a fatal flaw in the Maastricht agreement, its lack of linkage to the people of Europe. 'No serious democrat in Europe should find the Maastricht agreement on EMU acceptable. It would increase the democratic gap in the Community beyond the point of tolerability,' Mr Cooper wrote.

This is not simply negative criticism from an anti-EMU man. In pointing out the shared political characteristics of the Bundesbank and the US Fed, and how they differ from the proposed European central bank, Mr Cooper proposes revisions to the treaty that may shape thinking in this critical post-mortem period. But Tory dissidents eager to shoot down British participation in European union will not find ammunition in his proposals.

First, to the point that the Bundesbank and the US Fed are not de-linked, as many suppose, from the political process. The reluctant acknowledgement by the Bush Administration last week of secret meetings between the US Treasury Secretary, Nicholas Brady, and the Fed chairman, Alan Greenspan, prior to Mr Greenspan's reappointment to a second term, is food for thought.

Officials acknowledge that Mr Brady tried to wrest a commitment from Mr Greenspan that the Fed would help the administration achieve 3 per cent growth in 1992 in the run-up to George Bush's re-election bid. But whether this was a quid pro quo for Mr Greenspan's renomination is another question.

Some US officials say that Mr Brady misconstrued Mr Greenspan's remarks, reading them as a commitment to change Fed policy to a more expansionary course, with lower interest rates. Far more likely is that the Fed reacted to criticism from the administration and, more particularly, from Congress that it had been too slow to adopt a pro-growth monetary policy (most notably in the second half of 1991). There can be little question that the Fed pays close attention to Congress, which can sweep away its independence by amending a simple statute. Congress often threatens to do this in its bi-annual accountability sessions with the Fed.

The Bundesbank is also independent by virtue of a simple statute, which Germany's parliamentary system would allow to be changed by a Chancellor who felt thwarted by its actions. In recent years, however, this would have been an act of political suicide: it is highly favourable German public opinion that protects the Bundesbank's independence, not legal devices. There can be little doubt that the Bundesbank is accountable to the people.

Mr Cooper's thesis is that the shapers of the Maastricht treaty have taken the principle of central bank independence much too seriously, creating 'a powerful body of Platonic monetary guardians effectively accountable to no one'. He feels European voters have good cause to fear the sweeping monetary powers of a body whose decisions could be overturned only by treaty revisions, which would require ratification by the parliaments of all member countries. Under this scenario, the 'Eurofed' would hand down decisions that affected all the people, but without a mechanism to hold it accountable to any of them.

To fill this unacceptable 'democratic gap', Mr Cooper proposes several solutions, both long and short term. The revisions of monetary union need not be tied to a broader move to European federation. Mr Cooper suggests that the central bank council be made responsible to the European Council, a body of 'politically responsible national representatives' who could by qualified majority amend Eurofed decisions.

He says this would involve much less loss of independence than at first appears. No single government, caught up in election-year fever, could overturn Eurofed decisions, nor could a simple majority. But in the face of widespread disagreement, decisions could be reversed. It would be one way to reflect the peoples' wishes. No doubt we will hear more such proposals in the coming months.