ECB can be more open and keep its independence

Just a short taxi ride from the imposing headquarters of the German Bundesbank in Frankfurt sits the headquarters of the new European Central Bank. Its chosen location is no coincidence. The architects of monetary union were keen to imbue the new central bank with the aura of the Bundesbank, which has acted in many ways as Europe's de facto central bank.

But while the Bundesbank has a hard won reputation for fighting inflation and managing a strong currency, the European Central Bank (ECB) must build its own credibility. And the way it is set to go about its business will mean that this is no easy task.

Unfortunately for Europe's new central bankers, the group of politicians who agreed its structure are no more. Unfortunately for the rest of it, there are serious questions about the way the bank will operate, as it will have little accountability to anyone and is already developing a cult of secrecy.

The decision to establish the ECB in Frankfurt and to make it independent of political influence in the key areas of its operation was taken at the insistence of the former German government, led by Helmut Kohl. The price of German agreement to the single currency was a European Central Bank modelled on the Bundesbank - offering, or so it was argued, a guarantee to the German people that the euro would be at least as strong as the mighty deutschmark and that meddlesome fellows from other euro countries could not tell it what to do. So strongly did Germany put its case, that the ECB will be one of the most independent central banks in the world, with senior management holding eight-year terms and no clear lines of reporting to make it accountable.

Now, of course, Germany has a new Government and its social democrats, along with the French socialist government, have moved European politics to the left. If these guys had been in charge when the ECB was being established it would be based anywhere except Frankfurt (what would have been wrong with Strasbourg?), its terms of reference would have been different and politicians would have had a much greater say in its operations. But they weren't and already tensions are emerging between the new German finance minister, Mr Oskar Lafontaine - egged on by his French counterpart, Mr Dominique Strauss-Kahn - and the European Central Bank.

Once the euro is launched, these tensions will build, particularly if economic conditions take a turn for the worse. Some of the criticisms of the ECB coming from Europe's new political leaders are valid, but many are, so to speak, red herrings.

Yes, the ECB should be more accountable for what it does and be more transparent about how it does it. No, it probably shouldn't have its terms of reference changed from it current focus on achieving price stability to something that also includes promoting economic growth; after all, managing the currency and holding down inflation should in themselves promote growth, provided other policy measures are also appropriate. And no, the idea of setting exchange rate targets for the euro against the US dollar would risk further confusing monetary policy and could lead to inappropriate interest rate levels on either side of the Atlantic - or on both.

Perhaps the biggest problem about the new bank is its lack of accountability and its potential lack of openness. Accountability should not be confused with independence. The US Federal Reserve Board is one of the most independent of central banks, but its chairman, Mr Alan Greenspan, regularly appears before various arms of the US Congress, publicly explaining policy and fielding questions. The ECB president, Mr Wim Duisenberg, in contrast, will appear before the toothless European parliament just four times a year and the real business will be done behind closed doors in meetings with EU finance ministers.

France is keen to develop the euro-11 council - comprising the finance ministers of eurozone member-states - as a kind of political counterweight to the ECB, but there is no clear mechanism to make this happen. Setting out how exchange rate policy should be run, however, will be the one area where the finance ministers will call the shots - leading to potential conflicts if the Franco/German idea of setting a target range against the US dollar is pursued. After that the bank will be free to manage currency operations and, crucially, to set the level of interest rates.

In terms of transparency, the minutes of ECB meetings will not be published (the president offered to publish them 16 years after the event), its inflation forecasts - on which interest rate decisions will be based -will be kept secret and we can but hope that its president and other senior officials will take an active and open approach in making speeches and giving media interviews.

These are not academic issues. The ECB will quickly need to win the confidence of international investors, if the euro is to be a strong and stable currency. A central bank under fire from Europe's political leaders and lacking the necessary means of demonstrating how and why it is making its decisions may find this difficult to achieve. Investors are already wary after the unseemly row which will mean that the first eight-year presidential term is shared between Mr Duisenberg and Mr Jean-Claude Trichet, the French central bank governor. Also, the ECB needs to win wider acceptance among the public across the euro zone.

History meant that Germans looked to the Bundesbank to safeguard the currency, but the ECB is starting from scratch. Say, for example, it decides to push up interest rates to combat inflation in some parts of the euro zone, at a time when the economies of other member-states are suffering. Local politicians will not be slow to attack the ECB and try to shift the blame in its direction.

At a wider European level, the bank is already being pressured into reducing interest rates in early 1999 and will be blamed for any slowdown next year. If the public can't see how the bank is making its decisions and it is not publicly held to account, then it risks becoming the whipping boy for a range of economic ills ranging from slow growth to high unemployment.

It may only be down the road from the Bundesbank, but Europe's new central bank has a lot to do if it is to win the kind of respect given to its neighbour.