Monetary policy in Europe : towards a European Central Bank and one European currency

Most alternative blueprints for European Monetruy Union (EMU) differ in their opinions about convergence requirements or the need for binding fiscal rules and controls of individual national governments' debt policies, but there is, if not complete consensus, widespread agreement that the European Central Bank (ECB) should be independent of political control from both European Community (EC) institutions and national governments. The main argument for an independent European central bank is empirical: those countries in which central banks are insulated from the political process and charged with maintaining price stability have experienced the lowest and most stable inflation rates in recent decades. The present paper reviews and critically evaluates this political economy literature which relates inflation performances to the constitutional features of central bank statutes. Based on this assessment the draft statutes of the ECB and the constitutions of the individual European national central banks are discussed in terms of the independence they grant central bank board members from partisan influences. Furthermore, concrete country-specific suggestions for enhancing central bank independence during stage two of the gradual transition to EMU, which is to be completed by 1999, are made. It is argued that in some countries laborious constitutional reforms of central bank statutes are overdue and must be implemented in order to make these institutions fit for an anti-inflationary EMU.