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How Independent Is The ECB?

As the European Union prepares to welcome up to twelve new members, debate is heating up among the leading candidate countries about whether or not speedy adoption of the euro will promote or impede rapid catch-up growth. But expanding the reach of monetary union raises two equally fundamental questions for current euro members: does formal political independence for the European Central Bank deliver truly independent judgements about policy? If not, will expansion aggravate the problem because the biases of ECB members will become even more divergent than they are today?

Each new entrant into Europe's monetary union adds one member to the ECB's Governing Council, the group that sets the euro area's monetary policy. With 18 members, the Governing Council is already larger than the governing bodies of the US Federal Reserve Board, the Bank of England, or the Bank of Japan. To reduce the risks of unwieldiness, the ECB needs to reform its Governing Council now.

While the Nice Treaty does not permit re-structuring the Governing Council, it does allow for change in the voting rule that the Council uses. A rule that requires a rotation of votes among Council members, or that groups them into voting blocs, could replace the current one-man-one-vote scheme.

How would such a change affect European monetary policy? Enlargement of monetary union will increase the relative number of national central bank chiefs on the Governing Council. Each entrant will add one member, while the number of officials from the ECB's headquarters in Frankfurt will remain fixed at six. Some observers suggest that this shift will make European monetary policy more prone to the regional biases of national central banks.