An Old Lady shows the way

Two meetings will be taking place on Thursday to decide appropriate interest rates within Europe - and their settings could not be more different.

One will be held in an eighteenth-century room with 24-carat gold on the ceiling, overlooking a courtyard that is consecrated land; the other will take place at the top of a drab 36-floor tower, built in 1975 and overlooking a bar-cum-nightclub called Living.

But meeting room aesthetics are the least important dissimilarities between the decision-making apparatuses of the Bank of England in London and the European Central Bank in Frankfurt. The people in the meeting rooms - grappling with interest rates of 4.5 per cent and 3.75 per cent respectively - will differ even more markedly.

In London an executive committee of nine will be made up of five central bank officials and four independent economists. In Frankfurt a board of double the size will feature six executive members and 12 representatives of the national interests within the monetary union.

In the Bank of England committee room there will be a straight vote, with opposing arguments clearly recorded in minutes published a fortnight later. Atop the Eurotower there will be a 'shadow vote', where committee members tacitly signal their preference before officially voting the same way to show a consensus. Details of the discussion, and the vote, will remain secret for at least 16 years. ECB President Wim Duisenberg is unlikely to confirm that a vote even took place.

Most importantly, perhaps, the markets are uncertain and unsure about the direction of policy for the ECB's meeting, yet routinely hold up the Old Lady of Threadneedle Street as a standard-bearer of transparency and credibility.

The situation has worsened in recent weeks as political pressure continues to mount on the ECB to counteract the economic malaise in Germany. Last week, the euro area purchasing managers' index for October fell to its lowest level in the survey's four-year history, and French unemployment crept up again.

If the European Central Bank has a credibility problem now, the accession of a further 12 members from eastern Europe are hardly likely to clarify matters.

But a report from the Centre for Economic Policy Research argues that enlargement offers the perfect opportunity for ECB reform. And should reform follow the Bank of England model, it could enhance the performance of the European bank, and make it easier to sell the euro to the British public in a referendum.

'Transforming the governing council to an executive monetary committee would please the market and is the only rational solution for a monetary union of 30,' says Francesco Giavazzi, professor of economics at Italy's leading business school, at Bocconi University.

The report argues that the ECB statutes will have to change, taking power away from the representatives of the national central banks and placing it in the hands of an executive which makes decisions for the whole of the Eurozone. At the ECB's youthful stage of development, publishing minutes, vote records, even acknowledging whether a vote has occurred, is considered a risk. The bankers may come under domestic pressure to vote on the basis of national, rather than Eurozone economics.

Recognising this, a legal framework for institutional change was agreed at last year's Nice summit. Article Five of the treaty enables the EU to alter the Bank's decision-making procedures without waiting for a new inter-governmental conference. An annex to the treaty indicated a solution should come sooner rather than later.

Significantly, the process of changing the statutes can be initiated by the European Commission as well as by the ECB itself, once the treaty is ratified. Issues such as the publication of minutes and forecasts, and the confusing two-pillar strategy, could also be dealt with in the process.

In the UK, Government sources have often stressed the need for ECB reform. Giavazzi believes the enlarge ment process offers a last chance for the UK to participate in shaping the ECB - a task made difficult by its opt-out of euro membership.

So in addition to bolstering ECB credibility and confidence in the euro, reform of the ECB in the image of the Bank of England would be just the sort of propaganda coup needed to help the Prime Minister win the euro referendum.

A combined negotiation that saw reform of the statutes in advance of eastern European accession, a clear negotiating victory for the UK to take to a referendum, and an improvement in the standing of the ECB could help everyone. 'The main benefit is that you get someone from the Bank of England - like Mervyn King - on board at the ECB,' says Giavazzi.

It may seem a long way off yet, but it's worth noting that there were as many Government officials at the CEPR seminar as journalists.

faisal.islam@observer.co.uk

Preparing the ECB for Enlargement. www.cepr.org/Euro countdown - online special: www.observer.co.uk/euro