More power for ECB - economist

Giorgio La Malfa wants an overhaul of Economic and Monetary Unionrules, writes Una McCaffrey

Giorgio La Malfa wants an overhaul of Economic and Monetary Unionrules, writes Una McCaffrey

Economic and Monetary Union (EMU) must move a step further towards political integration if euro-zone economies are to be effectively managed now and in the future, a leading Italian economist and politician has said.

Mr Giorgio La Malfa, who addressed the Institute of European Affairs in Dublin earlier this week, is calling for a radical overhaul in the rules governing monetary union to be agreed as soon as possible.

He argues that to retain the Stability and Growth Pact as it stands would be "nonsense" in economic terms, since the rules it contains provide no space for addressing the sluggish growth that has prevailed within the euro zone in recent months.

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"We need a structure which allows for reflating the European economy," he says. "Those conditions are there today. Unemployment is very high and inflation is very low - the stability pact does not allow room for manoeuvre in these conditions."

The existing system places too much emphasis on inflation, according to Mr La Malfa, with the result that the European Central Bank (ECB) is "myopic" or excessively focused on one issue.

"The ECB should be convinced to accept a reasonable change in their rules," he says, noting that "it is impossible to run a car with only the brakes".

Mr La Malfa, who is chairman of the Finance Committee within the Italian parliament, is pushing for monetary reform to be adopted along three main lines, all of which fit with his vision of a European Union deeply linked along both economic and political lines.

Within his wish-list, the most significant element is a sweeping reconsideration of the stature of the ECB. The limiting political considerations that contributed to the initial establishment of the ECB in the Maastricht and Amsterdam Treaties no longer apply, he argues, making way for a move towards a system akin to that governing the Federal Reserve in the US.

"We have to at least enlarge its mandate to cover situations where inflation is not there," Mr La Malfa says.

This would see the ECB taking responsibility for areas such as growth and unemployment as well as interest rates, and allowing for the minutes of ECB meetings to be made public.

"They cannot be too secretive or too touchy," says Mr La Malfa of the bank's directors.

Behind this model would sit new functions for euro-zone finance ministers, who Mr La Malfa believes should be entrusted with developing macroeconomic guidelines for national governments so that "an acceptable trend" could be achieved on budgets. He also foresees the ministers taking responsibility for monitoring the euro zone's economic framework and the economic policies that derive from it.

"This can be taken as a sign of serious consideration of the problem," he says. "We need to increase co-operation in areas where it is useful."

Interestingly, these "useful" areas do not include taxation policy in Mr La Malfa's eyes. He describes his vision as a "collegial" system and does not feel comfortable with suggestions that it represents a move towards federalism. The very concept, he says, is enough to strike fear in the EU's smaller or more peripheral nations.

"The moment is not there," he says. "Give it 30, 40 or 50 years. Any attempt to accelerate this will create a backlash."

AS for the strict budgetary rules contained within the Stability and Growth Pact, Mr La Malfa is pushing for amendments that "take account of cyclical movements in economic trends".

In its current form, the pact applies fines where participating states let their public deficits exceed 3 per cent of gross domestic product, a stricture that Mr La Malfa sees as ripe for reconsideration.

He proposes that capital expenditure should, within limits, be excluded from deficit calculations, thus removing a pressure point for a number of EU governments. The limits would be significant, however, with only "good" spending, or outlay that is judged by Brussels authorities to carry benefits for the overall euro-zone economy, falling within the escape clause. A new tunnel under the Alps would fit the bill, for example, as might a motorway linking a capital city to a state's regions.

Such a view does not appear to be shared by European Commission President Mr Romano Prodi, who this week dismissed changes to the deficit rules because "some member-states" thought it necessary.

Taking a broader view, Mr La Malfa and Mr Prodi may be closer in outlook thamight be imagined. Mr La Malfa is firmly on the side of deeper European unification rather than a greater emphasis on the role of national governments, for example.

"I don't think when you have moved to a common currency, you can move back the responsibility for budgets to our national governments," he says, stressing that the EMU experience has injected some much-needed discipline into the budgets of participating states, such as his own.

"We are now very worried that inflation is 2.2 per cent instead of being 1.8 per cent," he says, laughing as he recalls the bad old days when such levels looked impossible.

It is as yet unclear whether Mr La Malfa's prime minister, Mr Silvio Berlusconi, values his advice on how EMU should proceed but reports suggest that he is interested in reform of sorts. Just last weekend, he summoned some of his fellow right-of-centre leaders to a retreat in Sardinia so that the issue of delaying compliance with the pact could be discussed.

Currently, budgets are due to fall into line by 2004.

All Mr La Malfa will say on the subject is that he knows Mr Berlusconi reads his numerous newspaper and academic articles on economic and monetary matters. Whether he agrees with them or not is another question.

Whatever form they might take, Mr La Malfa is convinced of the case for EMU rules to be changed, and changed urgently. As soon as EU heavyweight Germany elects a new chancellor later this month, the process may begin, he suggests.

Timetable aside, he is conscious of the need to get the rules right second time round, since a mistake would gain no respect in the markets, particularly if it forced yet another rethink.

"When you do it, you have to be very careful that you are not reneging on your commitments on financial stability," he says.