EUROPEAN CENTRAL BANK

The chances that the present Governor of the Bank of France, Jean-Claude Trichet, will become the next president of the European Central Bank took a knock when the prosecution in the Crédit Lyonnais trial demanded his conviction for fraud. Trichet was the head of the French treasury at the time when it is alleged that the bank s massive losses were being covered up. The prosecutor demanded a sentence of 10 months in prison. The prosecutor said that the people in charge of cooking the books were no amateurs and that the Treasury must have known what was going on. A judgement is expected in April. The Austrian Finance Minister, Karl-Heinz Grasser, said, Trichet can be a candidate for the ECB only if it is shown that he has not been involved in any criminal activity. [Handelsblatt, 6th February 2003]

The IMF has advised Serbia and Montenegro to set up the Serbian central bank as a successor to the Yugoslav central bank. The Montenegrins have vehemently opposed the idea. They are seeking to limit Belgrade's control over their new state. (Financial Times 13/1/03)

 Bank to smooth over any problems selecting his successor. The Dutch central banker hinted yesterday that EU leaders face a difficult task in the search for his replacement. "I'd like to stop on my 68th birthday on July 9. But I'm ready to stay a bit longer in the interest of a smooth succession," he told Bild am Sonntag newspaper. The race to succeed Mr Duisenberg was thrown into confusion last year when front runner Jean-Claude Trichet, the governor of the Bank of France was ordered to stand trial on an accounting scandal at the former state-owned bank Crédit Lyonnais more than a decade ago. Although the French government has vowed to stand by Mr Trichet, it is thought unlikely that other EU governments would agree unless he is able to clear his name of charges that he was involved in rigging accounts at Crédit Lyonnais when he was director of the French treasury. (The Guardian December 30, 2002)

The French government is preparing to back proposals for a fundamental reform of the European Central Bank (ECB). The changes would make the ECB's cumbersome decision-making process easier, allowing it to move more quickly to cut interest rates. If implemented, the reforms would allay many of the fears expressed by the Chancellor, Gordon Brown, and make it easier for the UK to eventually join the eurozone. The French position is crucial because a Frenchman, Jean-Claude Trichet, is widely expected to become the new head of the ECB in July, when current ECB President Wim Duisenberg steps down. In their proposal, economists Charles Wyplosz and Patrick Artus, argue that the ECB should replace its confusing "two pillar" inflation target - including complex calculations of monetary targets which have been largely abandoned elsewhere - with a broad numerical target, aimed at keeping inflation in a range of 1% to 4% (compared to the current target of 2% or under). They also say that the ECB's board - which already consists of the 12 central bank chiefs from all the countries of the eurozone - will become completely unwieldy after enlargement, when another 10 counties will eventually join. They suggest instead a small monetary policy committee, like that of the Bank of England, which has operational responsibility for setting interest rates to meet the target. They are also believed to argue, that like the Bank of England, the target should be symmetrical - allowing the Bank leeway to cut rates further if it fears that prices are dropping too low and there is a danger of deflation. Meanwhile, the ECB is engaged in a bitter struggle with the German government over the Growth and Stability Pact. Germany, which insisted on introducing a coda when the euro was introduced forcing countries to stick to strict Budget limits, is now itself likely to break that limit. As a consequence, Germany could in theory face fines imposed by other EU finance ministers of up to 5% of GDP ($60bn, £40bn) for breaching the target. The German government, and many economists, believe that the Growth and Stability Pact is too rigid and should be revised to take more account of the fact that deficits always rise during recessions. But the ECB, and many smaller eurozone members, are adamantly opposed. They fear that without the simple rule in the Stability Pact, there would be no way of coordinating monetary and fiscal policy in the eurozone, and inflation would eventually run rampant as countries printed money to counteract any tough decisions on interest rates. Indeed the French may want German support for their ECB reform plan as a quid pro quo in return for backing any changes to the Stability Pact. Changing the Growth and Stability Pact, however, will be even more difficult than changing the make-up of the ECB. Both will require possible treaty changes and arduous negotiations with member states - and neither will happen in time to influence what happens during the current economic slowdown. Until these both issues are resolved, Gordon Brown will have good reason to delay any plans for UK membership of the euro. (Solving aem Limited euro@solvingaem.com 10/11/02)

In a new pamphlet published by no this week Democracy and the European Central Bank, Dr James Forder looks at the ECB's record. The ECB has simultaneously presided over high unemployment and failed to meet its inflation target during most of the period since the launch of the euro - missing its own inflation target for 23 months running. * But despite its failure, the ECB has increasingly sought to expand its remit into other areas of European Union policy-making such as taxation. Between January 1999 and February 2002, the three most senior officials of the ECB had appeared 14 times before the European Parliament's Committee on Economic and Monetary Affairs. On 12 occasions, it called on Eurozone governments to cut taxes and public spending. * Unlike the Bank of England the ECB has a highly political agenda. ECB vice-president Christian Noyer attacks what he calls "allegedly acquired rights" and says the ECB has a "duty" to "help governments and parliaments to take decisions" on questions of public spending. * The ECB has been neither effective or politically neutral. The ECB's chief Economist Otmar Issing has warned, "Only now do some people seem to be getting the picture that this monetary arrangement has implications for many other policy areas too." ("No" Bulletin 24/5/02)

The European Central Bank (ECB) chief, Wim Duisenberg, is supportive of Commission plans to take over banking supervision from the EU member states. Speaking in the European Parliament monetary committee on Tuesday, Wim Duisenberg said he would sympathize with a move to strengthen the Commission responsibilities provided they did not interfere with the monetary policy decisions, which is a competence belonging solely to the ECB. (EUobserver.com 22/5/01)

In contrast to the close coordination between the UK Government and Bank of England, the ECB and the 12 Eurozone Finance Ministers have been embroiled in rows over spending, interest rates and appointments. The Treasury advisor in charge of assessing the 5 economic tests, Gus O'Donnell, has pointed out that even government spending policies are not coordinated in the Eurozone, and that as a result there can be no coordination of fiscal and monetary policy. (European Foundation Intelligence Digest Issue No. 135 7th February 2002)

The European Central Bank has put itself on a collision course with European financial regulators, including Britain's Financial Services Authority, over the ECB's ambitions to play a role in banking supervision. At a lunch in Frankfurt earlier this month, Wim Duisenberg (pictured) , the ECB's president, and Sir Howard Davies, chairman of the FSA, set out widely differing views and failed to reach a compromise. Tommaso Padoa-Schioppa - an ECB director who was last month given responsibility for banking supervision and who was also at the lunch - is believed to be a driving force behind the ECB's ambiti ons. At stake is the future regulation of the banking industry in what is expected to become an increasingly integrated European market. European Union governments may be called on to resolve the row. The issue is particularly sensitive for Britain, as it could lead to greater ECB involvement in financial regulation even in countries that have not adopted the euro. It could also mean that should Britain join the euro, it would come under pressure to change its regulatory system. Although the ECB has not made any formal proposals, officials have made it clear they want to see national central banks and the ECB playing a central role in banking supervision in the EU. The ECB believes it has a right to get involved because in a crisis it would face calls to bail out failing banks. Suggestions that banking supervision could be co-ordinated within the eurozone alone, excluding the euro "outs", were rejected, on the grounds that a system which excluded the EU's biggest financial centre, the City of London, would be irrelevant. Sir Howard's defiance reflects concerns shared by other European financial regulators. In Sweden, Denmark and Finland, as in Britain, banks are supervised by independent regulators. Many regulators fear that enhancing the ECB's role in supervision would create conflicts of interest, and they argue that the ECB's remit is explicitly confined to monetary policy under the Maastricht treaty. (Financial Times 29/1/02)

To add to Chancellor Schröder's problems, one of Germany's largest unions, IG Metall, is demanding huge pay increases of 5-7%. Thomas Meyer, chief economist at Goldman Sachs suggests that these increases could "threaten investment and employment and bring the economy to its knees" (Handelsblatt, 11 December). Entry into the euro has broken down the traditional bargaining process between German unions and the Bundesbank, in which the Bundesbank was able to provide unions with incentives to control wage claims, by lowering interest rates in return for wage moderation. The ECB is unable to respond to wage developments in individual countries. This leads to a loss of coordination between monetary policy and wage bargaining. ("No" Bulletin 13/12/01)

The European Central Bank is willing to let eurozone governments postpone their targets for achieving budget stability if the region fails to stage a healthy economic recovery next year. Senior ECB officials say the European Union's stability and growth pact, under which governments set target dates for putting their budgets in balance or surplus, may need to be interpreted with more flexibility in view of the severe economic slowdown. The ECB's attitude is likely to come as a relief to governments, particularly in Germany and France, whose budget deficits are rising to the point where they have almost no room to counter the slowdown with fiscal measures if they are to meet deficit reduction targets. ECB officials say the bank still firmly believes that governments should adhere to the goal of achieving fiscal balance over the medium term. Nor is there any suggestion that governments should be free to ignore the pact's stipulation that deficits should not normally exceed 3 per cent of gross domestic product. But they say the stability pact, which the EU drafted in 1996, was drawn up under different economic conditions and should be "intelligently adapted" to take account of the downturn. "It's difficult to say this now, especially in public. But next year, if the economic rebound isn't significant enough, it will have to be addressed," one official said. Since the ECB is not in charge of administering the stability pact, it would be up to governments to set new target dates for budget stability. But the ECB's attitude is crucial because it could in theory tighten monetary policy if it thought governments were reneging on their fiscal commitments. Under the pact, governments agree multi-year "stability programmes" that specify annual targets for fiscal discipline. The objectives set a year ago envisage that the 12-nation eurozone as a whole should have no budget deficit in 2003. However, those objectives assumed much higher economic growth than now seems likely this year and in 2002. Taken together, the programmes of the 12 countries implied eurozone growth of 3.2 per cent this year and 3 per cent in 2002. But the European Commission forecast on Wednesday that the eurozone would grow by only 1.6 per cent this year and 1.3 per cent in 2002. Commission experts estimate that the region's budget deficit rises by about 0.5 percentage points for every one-point shortfall in annual GDP growth. If growth remains weak next year, the eurozone could find it hard to eliminate its deficit in 2003. Economists say some governments would be pursuing needlessly restrictive fiscal policies if they tried to meet present targets in conditions of economic weakness. (Financial Times November 21 2001)

The European Commission has launched a bid to rein in the ECB. Documents leaked to the Financial Mail on Sunday show that an acrimonious battle is developing between the Commission and the ECB. The Commission is trying to take the ECB to the European Court of Justice to bring it under the control of the EU's anti-fraud agency, OLAF. Documents show that the ECB has accused the Commission of a "dramatic" breach of loyalty. The ECB warns that the move would breach its legal independence and could destroy market confidence in the euro. The ECB also alleges that the move would allow OLAF to police anyone - including UK firms - dealing or settling accounts in euros ("No" Bulletin 1/11/01)

The country that invented the "stability and growth pact", Germany, is now very close to destroying it. The SGP is the bedrock to monetary union. It was established to prevent the euro from being undermined by big-spending governments. Unable to cut rates or devalue, single currency members are pressured to tighten fiscal policy just when they should be loosening. Market estimates put Germany's deficit at 2.1% of GDP, way beyond the EC's 1.5% target. The Commission says the deficits of Germany, France, Italy and Portugal are now well above their SGP limits. "If and when the SGP unravels, this will exert downward pressure on the euro," says a director at Barclays Capital. Saying the euro can survive without the SGP is denying the implications of monetary union. Continental politicians understand that monetary union requires a federal tax system to ensure long term survival. (7% of GP is the minimum compared with the current 1.3%) A federal tax requires a federal government. And the Germans will be required to fund the weaker eurozone members. (Sunday Telegraph 12/8/01)

Britain's economy faces a grim 12 months, and on Wednesday, the Bank of England laid much of the blame for this at Europe's door, according to The Times. German chancellor Schröder's admission on Tuesday that Germany's economy will probably fail to achieve its 2 per cent target for growth in 2001 is the background of the Bank of England's anxiety over Europe. The Bank of England's quarterly inflation report (covering April, May and June) also highlighted weaker US conditions, writes The Times. The report continued: "More importantly for the UK, domestic demand in the euro area - and in particular Germany - has softened. This has compounded the effects of the slowdown in external demand." Mervyn King, the Bank of England's Deputy Governor, said that it had cut its forecast for world growth this year, adding: "Much of this results from weakness in the euro area economy." Herr Schröder blames world conditions for Germany's troubles, according to The Times, even though he and fellow European leaders argued repeatedly earlier this year that the eurozone would remain insulated from outside events. (EUobserver.com 9/8/01)

ECB board members have been holding a consistent line that a strong stable euro is in the zone's best interest. However, a high inflation reading is likely to put an end to any thoughts that the ECB could announce a rate cut after its Dublin Castle meeting. Inflation in the euro-zone will reach 3.4%. (The Irish Times 16/6/01)

In April, highest annual inflation rates were in the Netherlands (5.3%), Portugal (4.6%) and Ireland (4.3%); lowest rates were in United Kingdom (1.1%), France (2.0%) and Austria (2.5%). Compared with March 2001, annual inflation rose in twelve Member States, fell in two and was unchanged in one. Compared with April 2000, the biggest relative rises were in the Netherlands (1.7% to 5.3%), Sweden (1.0% to 3.0%) and Portugal (1.9% to 4.6%); the only (relative) falls were in Ireland (5.0% to 4.3%), Luxembourg (3.2% to 2.7%) and Denmark (2.9% to 2.6%). Lowest 12-month averages up to April were in the United Kingdom (0.9%), Sweden (1.6%) and France (1.8%); highest were in Ireland (5.0%), Spain and Portugal (both 3.8%). (Eurostat 15/5/01) http://europa.eu.int/comm/eurostat/

The euro slumped to a three-week low against the dollar after inflation figures from five euro-zone countries came in much higher than expected. The figures immediately cast doubt on the European Central Bank's surprise decision to cut interest rates by a quarter point. In Germany, Europe's largest economy, April inflation was revised up to a seven-year high of 2.9 per cent and economists said the inflation rate could be even higher in May. And in France headline inflation, one of the lowest levels in the euro zone, hit the ECB's official ceiling of 2.0 per cent. Meanwhile Spanish inflation outstripped forecasts to hit 4.0 per cent, in the Netherlands it leapt to 4.9 per cent and in Ireland it soared to 5.6 per cent, well above forecasts of a 5.2-5.3 percent figure. Late on Friday, the euro was worth 87.7 cents. (ITN News 13/5/01 http://itn.co.uk/news)

 The Financial Services Authority, the City regulator, and Liffe, the financial market, are investigating massive and unusual trading ahead of Thursday's surprise interest rate cut by the European Central Bank. Futures traders believe there was a leak of the decision to drop rates by 0.25 per cent. There was heavy trading of options on the financial markets on Wednesday, and by the end of Thursday morning Liffe had already had its busiest day since moving to electronic trading. The record had been broken before the ECB announcement was made ­ at 1pm, British summertime. (Sunday Independent 13 May 2001)

 The reaction of financial markets to last week's interest rate cut by the European Central Bank was reminiscent of the child who, after being served his favourite dinner, gobbles it up but announces it should have tasted better. The ECB drew heavily on the argument that new information about distorted M3 money supply data showed that there were no longer any inflationary pressures from the "first pillar" of the bank's official monetary policy strategy. For several reasons, this struck many in the markets as unconvincing. Was it really possible that the ECB did not have such information at its disposal in March or April?. What the markets really wanted to hear from Mr Duisenberg was that the ECB had reassessed its outlook for euro-zone economic growth this year and had decided that a rate cut would be useful insurance against the risk of lower than expected growth. Yet Mr Duisenberg went out of his way to assert that the ECB was not influenced by data for individual countries. Until the ECB has the full picture for the euro-zone, national data are treated as "anecdotal evidence", he said. In all likelihood, Mr Duisenberg did not mention one important reason behind the rate cut because it was one of those truths that is best left unspoken. This is, quite simply, that the ECB did not like the extraordinary pressure to which it was subjected in March and April to reduce interest rates. Maintaining its independence from politicians, pressure groups, international institutions and even other central banks is a prime concern of the young ECB. (Financial Times May 15, 2001)

The American economist, Professor Edward Luttwak, has said that most Americans find the actions of the European Central Bank incomprehensible. "The European economy is slowing down," he has said in an interview published in Italy, "there are ugly signs for employment in various countries, therefore the central bankers ought to reduce interest rates to relaunch growth. Instead, the only thing which interests these high priests of finance is inflation. In America, if any government presided over 7% unemployment, it would lose power. The Federal Reserve is independent like the ECB but if the Fed did what the ECB does, the White House would move in and shut it down." [Interview with Gian Battista Bozzo, Il Giornale, 31st March 2001, p. 18] (quote from European Journal)

Mr.Prodi suggested Britain will lose control of its economy "if it doesn't have its man in the ECB" (an attitude on his part that is clearly in breach of the Maastricht treaty, which insists that ECB Council members must pay no attention to developments in their own countries).( Romano Prodi's remarks to the Press Gallery/Eurofaq posting 22/2/01)

Go shopping in Paris, Hamburg, Vienna or Helsinki, and you would notice almost no difference in the price of a typical basket of goods and services. But in Amsterdam, Brussels or Dublin, the same basket would be 10 per cent cheaper. In Florence, Seville or Lisbon, you might pay 20 per cent less. As time passes, these differences are expected to narrow - not least because inflation is higher in those euro-zone countries where prices are, for the time being, lower. In effect, countries such as Ireland, Portugal and Spain are "catching up" with Austria, France and Germany as European monetary union increases cross-border price transparency and levels out variations in the cost of many products. In the meantime, however, the European Central Bank faces a tricky problem. It has to set a common interest rate for a 12-nation area where the difference between national inflation rates has actually increased since the euro's launch two years ago. "Current inflation differentials for some euro area countries are quite large," Wim Duisenberg, the ECB president, told an audience in Dublin last September. Pointing out that the ECB's monetary policy must be geared to the interests of the euro-zone as a whole, he added: "It is not in a position to influence the dispersion of inflation rates across euro area countries. If action is required, it must be taken through national economic policies." According to Eurostat, the European Union's statistical agency, the inflation differential between the best-performing and worst-performing states in November was 3.8 percentage points. Annual French inflation was 2.2 per cent, while Irish inflation was 6 per cent. An ECB analysis, published last month, shows that this differential has been increasing since 1997. In the third quarter of that year, it was only 1.4 percentage points. In the third quarters of 1998, 1999 and 2000, it was 2.1 per cent, 1.9 per cent and 3.7 per cent. The difficulty for the ECB is that, if it were to keep interest rates high to bring down inflation in Ireland or Spain, it would run the risk of choking economic growth in Germany or France. Conversely, a cut in interest rates on behalf of Germany or France could stoke yet more inflation in Ireland or Spain. (Financial Times January 9 2001)

The euro's weakness has strengthened the hand of those who want a bigger role for European finance ministers. Mr Duisenberg has consistently resisted any enhancement of the finance ministers' role, insisting that, as the self-proclaimed "Mr Euro", his voice alone should speak for the euro. But as Mr Euro's reputation tumbles with each drop in the currency's value, Europe's (finance) politicians are moving towards the view that, if they do not start working more closely together, there may be no limit to how far the euro - and Mr Duisenberg - can ultimately fall. (Irish Times 28/10/00)

The European Central Bank, which has been heavily criticised for its handling of the euro, is under fire from European members of parliament for the bonuses it paid its staff before the currency's launch. In a draft report by the European Parliament's powerful budgetary control committee, MEPs criticise the ECB for paying officials bonuses more than twice the maximum allowed during the 1998 financial year. The European Parliament is now expected to call on the ECB to ensure that bonuses in the next five years are in line with the ECB's inflationary target. The ECB is accountable to the European Parliament on monetary policy but not for its management operations. (Financial Times; Oct 25, 2000)

Doubts about the management of the euro were reignited on Monday after comments by Wim Duisenberg, president of the European Central Bank, sent the ailing currency near to an all-time low. In an interview with The Times published on Monday, Mr Duisenberg took the unusual step of discussing ECB intervention strategy. He dampened hopes of imminent intervention to support the euro by acknowledging that the timing of action by the Group of Seven central banks last month had been influenced by the US presidential elections. The statement surprised currency traders, and was taken to mean that there was unlikely to be further concerted intervention ahead of the presidential vote next month. Mr Duisenberg also suggested that intervention would be inappropriate to support the euro if it was undermined by the turmoil in the Middle East. In an apparent criticism of Mr Duisenberg, Ernst Welteke, president of the Bundesbank, said yesterday: "Interventions ... are effective only when one doesn't talk about them." However, analysts said Mr Duisenberg's comments were a strategic error. "Many of the speculative traders who had bought the euro after the intervention have been throwing in the towel," said Jim O'Neill, head of currency research at Goldman Sachs. "Mr Duisenberg has broken the cardinal rule of foreign exchange intervention: never discuss your strategy in public. His comments are stunningly incompetent." The action on September 22 helped win the euro three weeks of stability at 87-88 cents against the US dollar. But yesterday it fell to $0.8458, close to its low of $0.844. (FT.com site; Oct 17, 2000)

The European Central Bank, US Federal Reserve, Bank of Japan and Bank of England have joined forces to support the single currency, the euro. As a result the euro gained more than 3 cents against the dollar, rising from a recent low of $0.8440 to 0.8936, before sliding back slightly. The fact that four of the world's most important central banks have now acted together shows the deep level of concern about the euro's persistent weakness. The intervention comes at a crucial time, just one week before a referendum in Denmark on whether the country should join monetary union. It also comes at an awkward time for the Federal Reserve, with just over a month to go before presidential elections. Ralph Solveen of Commerzbank in Frankfurt said the participation by other central banks besides the ECB had raised the chance of success. But he warned the move could be counter-productive: "On one side, it shows the euro needs help, which is not a sign of strength for the euro. But on the other side, it could lead to fear in the market that further interventions are on the cards." (BBC ONLINE Friday, 22 September, 2000)

PURPOSE: to allow to the European Central Bank to effect further calls of foreign reserve assets from the national central banks. COMMUNITY MEASURE: Council Regulation 1010/2000/EC concerning further calls of foreign reserve assets by the European Central Bank. CONTENT: The aim of the Regulation is to allow the ECB to effect further calls of foreign reserve assets from the national central banks beyond the limit set in article 30.1 of the Statute, up to an amount equivalent to an additional EUR 50,000 million, in case of need for such foreign reserve assets. The central bank of a Member State whose derogation has been abrogated, or who is treated on the same basis as the central bank of a Member State whose derogation has been abrogated, shall transfer to the ECB a sum of foreign reserve assets determined by multiplying the euro value at current exchange rates of the foreign reserve assets which have already been transferred to the ECB, by the ratio between the number of shares subscribed by the central bank concerned and the number of shares already paid up by the other national central banks. ENTRY INTO FORCE: 17.05.2000. (Europa.com)

Wim Duisenberg said Britain would pay for its decision to stay out of the euro by being forced to accept a punishingly high exchange rate for the pound if it ever joins the single currency. His remarks dashed hopes that Britain would be allowed to devalue Sterling from its present stratospheric values – equivalent to 3.20 marks – before joining the euro. The last time Sterling was at these levels was in the run-up to Britain’s ill-fated decision to join the exchange rate mechanism. Mr. Duisenberg said the pound would have to keep a stable value against euro currency for the qualifying two-year period. Guardian 24/1/0)

The US Federal Reserve Chairman chided the EU for having inadequate statistics for measuring inflation. This was dangerous for the single currency. Only a few countries publish regular monthly data which means economists will be left with a disjointed picture of growth and inflation across the EU. Inflation had not been adjusted for new technologies and services. (FT 8/11/97)

Concern is increasing among analysts that lack of statistical data is damaging ECB credibility. Data deficiencies are highly problematic and the ECB does not have access to adequate, up-to-date information in important areas. There is no eurozone data for import and export prices, orders, building permits and the uses of income such as personal saving. Data on public sector deficits and wages are inadequate. The ECB has difficulty getting the fiscal and monetary policy right when the public sector accounts are published for full years only and a year in arrears. There are almost no timely, harmonised statistics for the euro area on wages developments. The ECB is poorly served relative to other central banks. In the US and the UK full quarterly public sector accounts are available and there is a monthly labour market release. (FT 9/5/00). The European Central Bank in Frankfurt has complained that it needs better quality statistical information if it is to run an effective monetary policy for the euro-zone. In a report, the bank calls for an exciting new accountancy "initiative", to be launched in co-operation with the European Union’s statistical office, Eurostat, for the improvement of the quality of economic statistics. One of the problems besetting the bank’s attempts to control the economy of Euroland has indeed been that national accounting systems differ, as do national ways of measuring certain key economic indicators. [Handelsblatt, 7th August 2000]

THE European Single Currency is heading for the worst crisis in its short history after revelations that the European Central Bank's future governor may have been part of a plot to sell the euro to the French electorate under false pretences. Jean-Claude Trichet, who heads the Bank of France and is due to become the next president of the European Central Bank in 2002, was placed under legal investigation on Friday. He is to be questioned over "spreading false information on the market and publishing inexact accounts" in relation to Credit Lyonnais, the ailing state-owned bank for which he had responsibility between 1987 and 1993. The magistrate who ordered the inquiry, Jean-Pierre Zanoto, has uncovered evidence that manipulation of the bank's figures led to a cover-up of losses of £4 billion in 1992. According to testimonies to M Zanoto, the deception was the direct result of pressure from the French government, for which M Trichet worked. It wanted to avoid an embarrassing financial crisis at the time of a referendum on joining the euro in March 1993. In the late Eighties Credit Lyonnais suffered disastrous losses after expansion plans came to grief. The bail-out eventually cost French taxpayers £8.8 billion. (Sunday Telegraph 30/4/00)

Imagine if the Bank of England had announced that Eddie George was under investigation for misleading the market and issuing misleading accounts over his role in the collapse of Barings. Or that Alan Greenspan was facing a similar inquiry over the great Savings and Loans disaster. That is roughly how serious it is for Jean-Claude Trichet, governor of the Bank of France, to be put under the microscope over his role in the Credit Lyonnais scandal. Mr Trichet is lined up as the next President of the European Central Bank, an institution that desperately needs to win the trust and confidence of the market in its nascent currency. You cannot credibly manage such a mammoth task, let alone deal with a banking crisis, as central bankers have to do, if everyone thinks you might be telling porkies. Mr Trichet's nomination was a sordid political fix in the first place. It followed a terrific row at a Brussels summit in May 1998 (chairman: T. Blair) when Jacques Chirac demanded that a Frenchman have the job, to go with those at the International Monetary Fund and the European bank for Reconstruction and Development. As is traditional on these occasions, the British Government nominated a Dutchman. Once everyone had agreed that the ECB should be free from political interference, they decided that 'Dim' Wim Duisenberg could have the job on the strict understanding that he would take early retirement, to make way for Mr Trichet, then established as a distinctly interfering French Treasury Director. (Daily Telegraph 1/5/00) Wim Duisenberg, the European Central Bank (ECB) president, indicated on Sunday that he would remain in office throughout 2002, denying knowledge of any agreement with France to step down any earlier. (EUobserver.com 31/12/01)

In a paper to be published in the house journal of the Institute of Economic Affairs in London, Professor Otmar Issing, the ECB's chief economist, is to give a stark warning that the euro zone countries must undertake speedier and more radical economic reforms. He writes: "The risk of failure can be summed up in a few words. An EU which enchains its huge innovative potential through all sorts of regulations, suppresses economic incentives through high taxes, seeks to protect its prosperity from the outside behind all sorts of barriers and strives to redistribute wealth internally, based on an ideology of equality portrayed as justice, renounces not only an important role on the world stage, but also its own future." His warning is the most powerful yet from a member of the ECB. He believes European economies "need some special medicine".... calls for a social union in the EU "go in the wrong direction. Rigid labour markets and misguided incentives provided by the social security and welfare systems are the prime causes of "alarmingly high unemployment in the euro zone" "Ideologies which are hostile to freedom and the market economy have proved extremely resistant in Europe" (D Telegraph 17/3/00)

The European Central Bank administered a shot in the arm to the sickly euro by raising its main ...rate to 3.5%. A menacing tone to the accompanying statement suggested that further rises may not be long in coming.( Financial Times 17/3/00)

The president of the European Central Bank made a bid to talk up the ailing euro. He hinted the ECB had a bias towards tightening. His comments triggered a bigger market reaction, with the euro jumping against the dollar. However, traders dumped European government bonds as they feared arise in European interest rates may now be on the cards. Relief for the euro came at a price -German government bonds faced huge waves of selling. (Daily Telegraph 16 July 1999). An increase in interest rates would be disastrous for Italy. The main reason why Italy has managed to meet, almost, the budget deficit on target is because of lower interest rates on the huge government debt - Ed.

Duisenburg speaking at Bank of Poland 4th May '99 said: "The voluntary transfer of monetary sovereignty from the national to the European level is unique in history. However, it should not be seen as a single, isolated event. The introduction of the euro is part of the process of European integration. This process started shortly after the second World War and has now been under way for more than half a century. The aims of European integration are not only, or even primarily, economic. Indeed, this process has been driven and continues to be driven by the political conviction that an integrated Europe will be safer, more stable and more prosperous than a fragmented Europe." (http://www.ecb.int)

Italy's Treasury Minister G. Amato was obliged to spend Tuesday pleading for other EU finance ministers for permission to increase his budget deficit from 2 to 2.4 %. They reluctantly agreed. Wm. Duisenberg, head of the ECB, openly attacked this decision, although the ECB is an institution with no statutory right to pronounce in this area at all. Duisenberg claimed that such a decision, would be a destabilising trend to undermine the credibility of the single currency. The EU finance ministers then left Amato in no doubt about the tax and public spending policies that Italy should now pursue - namely that he should not raise taxes, but must instead, reduce its expenditure on pensions. It is profoundly disturbing that a precedent for intervention in a country's tax and spending decisions could be set so early. It is also fundamentally undemocratic. The Italian electorate will shortly discover that its own preference on fiscal issues, the most basic of all political questions, are of distinctly modest relevance. It may well be the case that Italy's pension arrangements are irrational and unsustainable. But it is for the Italians to decide whether they wish to make what might seem as extravagant compensation for the elderly, or how and when they might want to retreat from such commitments. Their preference should not be subject to an invisible veto from either EU finance ministers, or the President of the ECB". (Times 28/5/99)

Fudge was on the menu again at the European Union finance minister's meeting. Italy was trying to get other countries to accept slippage in its fiscal deficit from 2 to 2.4% of gross domestic product this year. The deal illustrates that governments are already chafing at the Stability Pact's constraints, it may be honoured more in the breach than the observance. Bond investors, seduced into believing there is barely any credit risk in the European government debt, should take note. (Financial Times 26 May 1999)

Central banks in Asia spurn the euro in favour of the dollar. Asian governments, which include five of the largest holders of reserves, have cold-shouldered the euro because of its weakness since its launch. Most central Asian banks are waiting for the euro to reach a floor in the market and establishing a track record before starting any switch out of the US dollar. Officials of the ECB have tried to send out signals that the euro has fallen far enough. (FT 3/5/99) On Thursday 28 January, Dr. Itmar Issing, one of the six executive board members of the ECB (the innermost circle of innermost circles of Euroland) addressed the European-Atlantic Group in the House of Commons and later at the St. Ermin's Hotel near Victoria Station. . He introduced the novel notion of "the ultimate sovereign - the people of Europe". We have not heard much of this beast before, certainly not as our 'ultimate sovereign' to whom the Queen, in common with all other Heads of State of the 15 EU countries, must now crook her knee. Yet Issing hardly has a reputation for wild and revolutionary constitutional innovation. If he refers to a concept of 'the ultimate sovereign - the people of Europe', it is a fair bet that this is not a personal chimera but has solid, official Commission support. ... The ECB's reports will be made to the Council of Ministers and the Commission as well as the EP. And "most importantly, the President [of the ECB] will hold an extensive press conference ... every month, ... [and present] a detailed assessment of the economic situation and the outlook for price developments ... followed by a question and answer session." These arrangements, Issing stated, "achieve ... the accountability ... vis-à-vis the supreme sovereign, i.e. the people whose interests the institution must be seen to serve." The ECB has undertaken to provide such accountability in exchange for its independence from political control. These policies, he made crystal clear, would be set for the Euro-land area, and would not, under any circumstances whatsoever, take into account any special conditions in a member state. "National considerations must ... play no role in the decision-making process." (Eurofaq posting Christopher Arkell 14/2/99)

European central banks are grossly overstaffed despite the imminent transfer of monetary policy to the ECB. The 11 central banks employ 53,200 staff; the ECB employs 550 and is recruiting fast. This compares with the American Federal Reserve that employs 23,200 for an economy a third larger. (D Telegraph 14/12/98)

The Governor of the Bank of Italy, Mr Fazio, said Europe's national central bank chiefs want to retain significant influence over monetary policy. He hinted at a clash between central bank governors and the permanent executive board under Wim Duisenberg. The ECB's governing council of six executive members and 11 national governors will set interest rates. It was noted that national central banks have research staff significantly larger than Mr Duisenberg. This would allow Mr Fazio, who is bolstering his research department's work on the European economy, to question analyses by the executive board's economists in Frankfurt. American experts have said Europe should learn from the mistakes of the US Federal Reserve system, established in 1913 as a decentralised central banking system, which spent 20 years in chaos. Mr Fazio's call for a more decentralised ECB can be seen as an attempt to keep a grip on power. The Bundesbank president has stressed repeatedly that the European System of Central Banks - the ECB and national banks - will be far more decentralised than the German system. (Financial Times 10 November 1998)

The Maastrict Treaty forbids the publication of the minutes of the meetings of the ECB's governing council. The bank is only required to issue an annual report (FT 8 & 12/8/97)

In June 1998 President Clinton authorised the Federal Reserve Bank to intervene aggressively in the currency markets to support the yen. This halted the potentially disastrous slide in the Japanese currency. At the same time it was revealed how slowly the new ECB could respond to financial crises. Only if currency changes threatened price stability would the ECB be allowed to act alone. In every other case the Maastricht Treaty rules that only finance ministers and their bosses have the power to act. The Americans will continue to shoulder most of the burden of crisis management. (European Voice 25/6/98). The US intervention came about after intensive political discussion but the ECB will have no political counterpart. After the next wave of countries join the EU the euro-zone may displace the dollar as the world's most important currency. The ECB is likely to be unenthusiastic about large-scale intervention in foreign exchange markets. Nobody will be in charge and no one would be accountable. EMU could turn out to be a culture shock to the international financial system. (FT 22/6/98) The IMF highlighted the ECB's lack of a proper framework for crisis management. It pointed out the separation of roles with the ECB responsible for monetary policy and national authorities responsible for financial supervision. In a crisis these roles overlap. National central banks will be unable to act as lenders of last resort. This role falls to the ECB but it needs a set of rules and lines of communication since the ability to act quickly is vital. The current ambiguous situation should be resolved before EMU begins (FT 23/9/98). The US Federal Bank made an emergency cut in interest rates on 15 October. This will not restore confidence in the markets without reciprocal action from the ECB. With its trademark of provincialism, however, the ECB continues to ignore the chain-reaction that is afflicting large parts of the world (D Telegraph 17/10/98)

A meeting of central bankers in Frankfurt joined forces to resist the hijacking of the new European Central Bank by politicians. Although not mentioned by name, Mr Lafontaine has violated the independence of both the Bundesbank and the ECB by demanding cuts in interest rates to boost job creation. (D Telegraph 21/11/98)

The ECB co-ordinated the interest rate reduction by 11 central banks in December 1998. The rate cut, however, had no obvious justification in terms of ECB policy. Money supply growth is well within the targets set. Inflation is well within the target range as well. The gulf between the ECB's announced strategy and its policy may be one of the reasons why Mr Duisenberg remains opposed to the publication of minutes. (FT 8/12/98). Nothing to do with political interference? -Ed

Prof.William Buiter (Bank of England monetary policy committee) said "urgent reform of the rules and procedures of the ECB was needed to save it and the single currency project from disaster" in a paper published yesterday by the Centre for Economic Policy Research. He forecast the collapse of the Euro with some members withdrawing. He urges the ECB to follow the example of the Bank of England by publishing minutes of its meetings without delay. He believes the ECB should make inflation target clearer ... and that they publish an inflation forecast. (BBC R4 Today Programme 21/4/99)

The President of the Austrian Central Bank suggested that the ECB would meet asymmetric shocks by supplying different levels of liquidity through the national system of central banks. There is a fatal flaw. In Euroland's free capital markets there is no guarantee that increased liquidity released through one nation's central bank will not be borrowed by others for whom it was not intended. (European 6/7/98)

There has been a robust growth in the euro-zone's money supply, rising at an annual rate of 10%. Although the ECB is only supposed to target inflation officials said they would put money supply at centre stage. The target growth rate is 4%. The figures could be wrong or unstable. If correct and stable then it is cause for alarm and points to high inflation in the future. (FT 14/7/98)

In the lead up to EMU there has been a clear slowdown in the reduction of deficits. The 15 member states radically watered down the Commission's draft macro-economic guidelines for 1999. They struck out references to state aid controls, implementing single market directives, individual country's budgetary policies, and a warning that structural budget deficits were creeping up. The ECB is likely to adopt a more stringent stance. (FT 6/6/98). The ECB President warned that either national governments cut budget deficits or risk higher short-term interest rates. The ECB's chief economist Otmar Issing has realised that the political will to make more progress on deficits is waning. The French say there is no excessive deficit and it would spend the growth dividend. Chancellor Kohl has pumped DM25bn into make-work schemes to cut record unemployment. EU structural budget deficits will widen from 1.9% in 1997 to 2.1%. (European 13/7/98). Wim Duisenberg said a divergent growth rate in the euro states creates a tremendous dilemma. Progress towards a common interest rate has stalled. Ireland and Spain, whose economies are overheating, will either have to cut spending or raise taxes. He fired a shot across the bows of some states seen to be loosening tax policies. (Scotsman 9/7/98)(FFP). 'Spendthrift' governments warned to cut the burden of debt EU were accused of misusing economic recovery to increase spending instead of paying off debt. Otmur Issing, chief economist Central Bank {ECB), gave warning that the budget deficits of several member states were coming down far to slowly for the current stage of the economic cycle, leaving them exposed to serious difficulties in the next downturn. (Daily Telegraph 11/1/2000)

The concern is that loose fiscal policies (Taxes) will make the ECB's task of controlling inflation even more difficult. The lurid fear is that without consistent fiscal restraint the ECB will have to respond to inflationary pressures with an excessively restrictive monetary (Interest rates) policy. This is odd. Controlling inflation is essentially a monetary matter. The short term impact of fiscal policy on demand management is relatively weak The active use of fiscal policy, however, is increasingly being touted as the remedy for the fundamental problem of the monetary union, namely that one interest rate policy will not fit every economy of the union. The use of fiscal policy for demand management implies significant deficits and surpluses and regular divergence from the balanced budget rule. (The European 13/7/98)

Traders in the debt markets are becoming increasingly frustrated by the failure to specify the role of the ECB in the supervision of the banking sector. Who will be the lender of last resort in the event of a banking collapse? The developments in Ireland with the possibility of non-performing property backed loans could bring the matter to a head-Ed. (European 27/4/98). The ECB has no mandate to bail out banks in trouble. It will not act as the lender of last resort, unlike some central banks. (FT 22/6/

On Thursday 28 January, Dr. Itmar Issing, one of the six executive board members of the ECB (the innermost circle of innermost circles of Euroland) addressed the European-Atlantic Group in the House of Commons and later at the St. Ermin's Hotel near Victoria Station. During the after-dinner discussion, a questioner raised the subject of the Republic of Ireland's unsustainable boom, made worse by the reduction of its interest rates to euro-zone levels. Dr. Issing replied that the Republic of Ireland had made the wrong decisions about its fiscal and monetary policies in the months before January 1999. The consequences will be a boom and bust which will do great damage to its economy, and the country will suffer possibly for many years after its economy crashes. (Eurofaq posting Christopher Arkell 14/2/99)

City back-office staff will once again be able to enjoy traditional bank holidays such as Easter Monday and Boxing Day, after a change of heart from the European Central Bank. Until now, the ECB had planned to keep bankers noses to the grandstand by keeping the Target European payment system open on every single weekday, except Christmas and new year. The banks have been grumbling about how expensive and tiresome it is to keep their payments offices open on days when most of Europe's financial markets are closed, and there is little for them to do. (Financial Times 7 May 1999)

In the pre-EMU world all countries have an AAA credit rating because they can never default on their debts, they can simply print the required money. After EMU, when countries have lost their sovereignty, then they can have lower credit ratings. The Italian government is expected to have an AA- rating. There will be the risk that citizens of countries deep in debt could indulge in a tax strike leaving the possibility of government debt default. The no-bail-out policy of the EU will exacerbate this risk (FT 21/10/96). Belgium has a national debt of over 30% of GDP and has the highest proportion of short-term debt in Europe. It will lose much of its ability to manipulate these liabilities when the Belgian franc disappears on January 4. This changes the credit profile. And Belgium will downgrade to AA, possibly AA-.Belgium's weak debt position could contaminate the ECB' independence which is committed to no bail out. The ECB is pledged not to print money or restore liquidity when a member state is in difficulties. In practice the political pressure to do something would be overwhelming. (FT 16/12/98)

The Maastricht treaty does not give the ECB full control of a monetary policy. It created a parallel structure in which the national central banks, the Bank of Italy, say, can create unlimited amounts of liquidity by selling government bonds on the open market. In effect, this can give member states a back door for financing their deficits, with inflationary consequences for the whole new block. In theory, the Stability Pact agreed last year should prevent any country from running large deficits, but theory is not going to account for much in the face of massive political pressure. With unemployment running at 22% in south of Italy for instance the Italian government will be tempted to loosen the belt after years of fiscal austerity. (Daily Telegraph 26 March 1998)

Under the Maastrict Treaty it will be illegal for democratically elected politicians to seek to influence the European Central Bank in the performance of its tasks. Unelected and unaccountable professional bankers who will be in post for 8 years will run the ECB. (FT 30/10/96). The Maastrict Treaty forbids the publication of the minutes of the meetings of the ECB's governing council. The bank is only required to issue an annual report (FT 8 & 12/8/97)

The French Finance Minister, Laurent Fabius has suggested that Eurozone finance ministers might, in future, set the inflation target for the European Central Bank. He described the suggestion as "the sort of question we have to ask". M Fabius also underlined his support for tax harmonisation with a warning that unbridled tax competition could destroy Europe's economic and social structure (Financial Times, 12 July 2000).

Wim Duisenberg, the prospective Director, said that he had grave hesitations about publishing the minutes of the policy-making meetings of the European Central Bank. (FT 31/1/98). The European Parliament called on Mr Duisenberg, the President-elect of the European Central Bank, to publish the minutes of the ECB Board meeting within five years. Mr Duisenberg said it would be counterproductive to publish minutes too soon, minutes should be published after 16 years. (EP News May 1998). The idea of publishing the minutes of the central bank is anathema to most central bankers, particularly the Bundesbank. They prefer investors to guess who voted for changes in interest rates. Anything more than consensus reports would cause confusion, they warn. So far the EMI has simply toyed with attempts by the European Parliament oversight committee to scrutinise its activities. (European Voice 2/4/98). Gordon Brown the Chancellor said the credibility of the ECB will depend in its transparency and willingness to establish a dialogue with the European public. It must establish a regular reporting system. (FT 8/4/98) Although the ECB has promised detailed explanations of policy decisions this might not be good enough. The public wants to know how decisions are taken. This would require publication of the bank's minutes, which has been vetoed. The ECB goes further. It refuses also to publish two-year inflation forecasts. This is the cornerstone of monetary policy strategy. The ECB claims the forecast would be self-fulfilling. Would that life was so simple! The ECB has set its objective as price stability with an inflation ceiling of no more than 2%. There is no floor, implying acceptance of deflation. It will also use a basket of other economic indicators such as estimates of output gaps. These indicators will not be published. The ECB's monetary aggregate will be a "reference value". This is an unfortunate term as the Maastricht treaty used "reference values" for EMU convergence. Several countries violated these values yet were accepted into Euroland. The ECB intends to make decisions in secret, using forecasts it will not reveal, to achieve objectives it does not need to justify. The envisaged combination of plentiful discretion with negligible transparency is more than unacceptable. It is highly dangerous. (FT 15/10/98)

The Council of the ECB will keep secret the voting pattern of its members. Publication, it is claimed, would encourage undesirable scrutiny of member's voting patterns and encourage external pressures on Council members from local interests. National political authorities will undoubtedly put pressure on "their" nationals serving on the ECB board, as well as on their central bank governors, even though this is against the spirit of the treaty. Voting patterns will be leaked but this is a poor substitute for proper accountability. The information, however, will not formally be available to the bodies charged with supervising the ECB (the European Parliament). Council members will be able to hide behind a cloak of confidentiality and avoid having to defend yielding to political pressures. (FT 24/9/98)

Scrutiny of the European Central Bank falls to the European parliament. The benefits for a parliament with a featherweight reputation can hardly be exaggerated. The Sub-Committee for Monetary Affairs will hear the ECB's quarterly reports. The Economic and Monetary Committee will hold two meetings a year on economic policy. Once a year the president of the bank will give an annual report to the full parliament. In any dispute the ECB would win. It has more protection and independence than any central bank in the world. (European 26/7/98)