[24/08/2005] Euro bank: secretive & sloppy

"SECRETIVE AND SLOPPY" EURO BANK ATTACKED

By Ambrose Evans-Pritchard, Daily Telegraph,23 August 2005

The European Central Bank has been accused of secrecy, ineptitude, and
sloppy use of inflation targeting by one of Britain's leading monetary
experts.

Prof Charles Goodhart, a former member of the Bank of England's monetary
policy committee, said the ECB's claim to manage inflation over the "medium
term" was an empty mantra that let it dodge responsibility for failures.

In an open letter to ECB president Jean-Claude Trichet, published in the
journal, Central Banking, he slammed the "conscious refusal" to be more
precise.

"Is the medium term two years, three years, five years, n years, or what? By
refusing to define the term, you can never be accused of missing your
target. [It] is just an exercise in obfuscation," he said.

He counselled Mr Trichet to have a good night's sleep before handling the
press following key decisions - given past gaffes.

"A meeting of the governing council is likely to be tense, often lengthy,
and almost always extremely fatiguing. You will face the world's media at a
time when you are worn out and stressed. I think it fair to claim that your
predecessor suffered many of his most unhappy occasions at exactly such
press conferences," he said.

Mr Goodhart, emeritus professor at the London School of Economics, said the
ECB should air its internal policy disputes by publishing the minutes rather
than relying on secrecy to give a false sense of unity.

"It is hardly desirable, nor does it lead ultimately to credibility, to
suggest that consensus existed when, in practice, it did not," he said.

An ECB spokesman said secrecy was needed to shield the governors from
national pressure. "Some could be in a hard position in their home countries
if it was known how they argued at meetings," he said. Mr Trichet is
expected to address the criticisms at a press conference on September 1.

The letter was part of a The Euro at Risk series published in the latest
edition of Central Banking.

An article by Henrik Enderlein, a professor at Berlin's Free University,
said the euro's one-size-fits-all monetary regime had blighted Germany from
the outset.

"Germany is the biggest economy in EMU and, as is now becoming obvious, has
suffered most from the current EMU set-up," he said.

Prof Enderlein said interest rates had been 11.2pc too high for German needs
on average since 1999, reaching a peak distortion of 31.2 in early 2001.

He doubted whether structural reform in Germany could be successful until
monetary policy comes to the rescue. "Ultimately, there could be a risk that
EMU splits into two equally-sized groups of countries, one with high growth
and high inflation, the other with low growth and low inflation," he said.

While monetary policy was likely to be wrong for all states, those like
Germany with very low inflation (or high real interest rates) could be
trapped in a "bust cycle".

He said the only solution is for the ECB to drop its one-size-fits all
policy and instead set rates for a homogenous core built around Germany.

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