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EU: ECB Chief Assesses Impact Of Eastward Enlargement On Bank

European Central Bank President Wim Duisenberg has endorsed the idea of reforming the bank's governing council before the coming eastward expansion of the European Union. In testimony this week to a committee of the European Parliament, Duisenberg said that in its present form, the council would not be able effectively to make decisions once the EU almost doubles its membership. But achieving reform at the bank, which is in charge of the euro, will not be easy. RFE/RL correspondent Breffni O'Rourke reports.

Prague, 7 March 2001 (RFE/RL) -- Wim Duisenberg, president of the European Central Bank, or ECB, has focused attention on a problem which could spell eventual trouble for the euro, the European Union's common currency.

The euro, introduced in most EU member states just over two years ago, has languished as a weak currency for most of its short life. But in recent months it has strengthened, and Duisenberg is signaling that the ECB knows it must come to grips with a major structural problem, or eventually put confidence in the currency at risk.

The problem is how to achieve efficient decision-making at the ECB once its governing council is swollen in size by the presence of central bank chiefs from Central and Eastern Europe. The Eastern candidate countries are due to start entering the EU in the next few years. After that -- when they fulfil the conditions -- they will join the EU's Economic and Monetary Union, or EMU, and become entitled to a seat on the ECB's governing council.

Duisenberg told a European Parliament committee this week that there is no way that quick, effective decisions could be made by a council of up to 27 members. So, creating a smaller, tighter governing council is necessary.

Duisenberg said he believes the most likely outcome will be a rotation system, under which the member states take seats in turn on a small governing council. But that idea is fraught with difficulties. Is it realistic to suppose that France and Germany, for instance, would allow their central bank governors to wait outside the council doors, while bankers from Portugal, Latvia, and Bulgaria are inside deciding monetary policy for the entire bloc?

The final decision on how to structure the ECB will be up to the EU heads of state or government, and national interest is bound to play a part in that decision. But analysts like Stefan Schneider of Deutsche Bank Research say Duisenberg and his executives can influence the outcome. Schneider told RFE/RL:

"It would be the politicians at the end of the day [who would decide]. It would certainly be difficult, but I guess that if the ECB came up with a convincing proposal, it would be very difficult for the politicians to tinker around with that."

A spokesman (unnamed) for the ECB in Frankfurt told RFE/RL that the governing council will formulate a proposal at what he called an "appropriate" time. The spokesman would not go into detail on when that would be or on the likely content of the proposal.

In Helsinki, an analyst who has been studying the ECB's structural problems is suggesting a method designed to overcome the "big countries versus small countries" rivalry.

Mika Widgren, the research director of the Yrjoe Jahnsson Foundation, tells our correspondent that if the eventual membership of the euro-zone grows to 27 members, it could be divided neatly into three groups. Each group would contain nine central bank governors, and each would contain one of the big core member states of the euro-zone. These groups would rotate in turn, so that at any given time there would be in place on the governing council both big and small countries. Widgren says:

"As an example let's think that we form three groups, one based on Germany, another on France, and the third one on Italy. So [in this scenario] we would have nine central bank governors in the ECB plus the [six] executive board members. So let's think that the German-based group starts, and then after a couple of years, the France-based group takes over, and so on [in rotation]."

Central bank governors are not national representatives and their views are meant to be independent of governments at home. Yet they sometimes have national preoccupations on their minds.

Some analysts also see the possibility that the new Eastern members will have a different set of priorities than those of the old members, and thus their approach to monetary policy will be different. Schneider of the Deutsche Bank says that owing to what he describes as the "catching-up process" that Eastern countries are engaged in, they might tend, for example, to support looser monetary policies, and therefore higher rates of inflation:

"Although these countries do not have a big economic weight, you would have a bigger number of fast-growing countries with a slightly higher inflation rate, which means that the inflation rate in the core countries like Germany or France needs to be even lower than 2 percent to compensate for the higher inflation rate elsewhere."

But Maria Giannetti, a research fellow at the Stockholm Institute of Transition Economies, says she believes that whichever way the ECB governing council is arranged, the big countries will dominate. She notes that the ECB's current monetary policy is very like the one pursued by the powerful German central bank, the Bundesbank, and does not reflect what the central banks of less prominent countries like Spain and Ireland are doing. For that reason, she says, she does not think that the Easterners will have much influence. She takes as another example Latin America:

"In America people speak of the dollarization of the Latin American economy. And that is a kind of asymmetric monetary union, in which for instance Ecuador adopted the dollar but does not have anything to say about monetary policy. And I think that if in 10 years the Eastern European economies adopt the euro, I think it will be something similar to that."

As Giannetti says, the time frame for incorporating the Easterners into the common currency process is a long one, which means there's still ample time to settle the bank's problems. But Duisenberg's comments this week show the ECB is already thinking about how to tackle them.