EUROPEAN PARLIAMENT

««« « « « « 1999 « « 2004 «««

Session document

24 April 2002

FINAL A5-0146/2002

REPORT

on the appointment of Mr as Vice-President of the (7267/2002 - C5-0186/2002 - 2002/2063(NOM))

Committee on Economic and Monetary Affairs

Rapporteur: Christa Randzio-Plath

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EN

CONTENTS

Page

PROCEDURAL PAGE ...... 4

MOTION FOR A RESOLUTION ...... 5

EXPLANATORY STATEMENT...... 6

ANNEX 1: CURRICULUM VITAE OF THE CANDIDATE...... 7

ANNEX 2: QUESTIONS AND ANSWERS...... 12

ANNEX 3: OPENING STATEMENT OF THE CANDIDATE...... 24

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EN PROCEDURAL PAGE

By letter of 15 April 2002 the President of the Council consulted Parliament pursuant to Article 112(2)b of the EC Treaty on the Council's recommendation concerning the appointment of Vice-President of the European Central Bank (7267/2002 - 2002/2063(NOM)).

At the sitting of 24 April 2002 the President of Parliament announced that he had referred the recommendation to the Committee on Economic and Monetary Affairs as the committee responsible (C5-0186/2002).

The committee had appointed Christa Randzio-Plath rapporteur at its meeting of 26 March 2002.

It considered the Council's recommendation and draft report at its meetings of 23 April 2002.

At the latter meeting it adopted the motion for a resolution by 21 votes, with 1 abstention.

The following were present for the vote: Christa Randzio-Plath, chairman and rapporteur; José Manuel García-Margallo y Marfil, Philippe A.R. Herzog, and John Purvis, vice- chairmen; Generoso Andria, Lutz Goepel (for Renato Brunetta), Lisbeth Grönfeldt Bergman, Christopher Huhne, Othmar Karas, Giorgos Katiforis, Piia-Noora Kauppi, Christoph Werner Konrad, Wilfried Kuckelkorn (for Mary Honeyball), Ioannis Marinos, David W. Martin, Hans-Peter Mayer, Miquel Mayol i Raynal, Mikko Pesälä (for Carles-Alfred Gasòliba i Böhm), Alexander Radwan, Bernhard Rapkay, Olle Schmidt, Bruno Trentin.

The report was tabled on 24 April 2002.

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EN MOTION FOR A RESOLUTION

European Parliament resolution on the appointment of Vice-President of the European Central Bank (7267/2002 - C5-0186/2002 - 2002/2063(NOM)).

The European Parliament,

− having regard to the Council's recommendation of 15 April 2002 (7267/2002),

− having been consulted by the Council pursuant to Article 112(2)b of the EC Treaty (C5-0186/2002),

− having regard to Rule 36 of its Rules of Procedure,

− having regard to the report of the Committee on Economic and Monetary Affairs (A5- 0146/2002),

A. whereas at its meeting of 22 April 2002 the Committee on Economic and Monetary Affairs heard Mr Lucas Papademos, the Council's nominee for the office of Vice- President of the European Central Bank, and at its meeting of 23 April 2002 considered the nominee's qualifications in the light of the criteria laid down by Article 112 of the EC Treaty,

1. Delivers a favourable opinion on the appointment of Mr Lucas Papademos to the office of Vice-President of the European Central Bank;

2. Instructs its President to forward this opinion to the President of the Council, for forwarding to the governments of the Member States.

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EN EXPLANATORY STATEMENT

Introduction

1. By letter of 15 April 2002, the Council consulted the European Parliament on the nomination of Mr Lucas Papademos to be Vice-President of the European Central Bank for a term of office of 8 years). The Parliament's responsible Committee on Economic and Monetary Affairs then proceeded to evaluate the credentials of the nominee, in particular in view of the requirements laid down in Article 112 of the Treaty and in the light of the need for full independence of the ECB pursuant to Article 110. In carrying out this evaluation, the Committee received a CV from the candidate (see annex 1) as well as his replies to the written questionnaire that was sent out to him. (see annex 2). The Committee subsequently held a two hour hearing with the nominee on 22 April 2002, at which he made an opening statement (see annex 3) and then responded to questions from members of the Committee. (The full transcript of the hearing is available both in paper form and on the committee's Internet site.)

Evaluation

2. The rapporteur considers that the nominee's record demonstrates that Mr Papademos is an excellent candidate in terms of the main requirements laid down in the Treaty, namely personal integrity and recognized standing and professional experience in monetary and banking matters. All this was amply confirmed by the nominee's replies at the committee hearing on 22 April.

3. The rapporteur also notes that the hearing was especially useful in showing the nominee's specific approach, in particular his balanced judgement, his openness to the European Parliament's position on democratic accountability and transparency, and his commitment to pursuing and enhancing the dialogue between the two institutions.

.

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EN Annex 1: Curriculum vitae of the candidate

CURRICULUM VITAE

Lucas D. Papademos

Personal

Date of birth: 11 October 1947

Place of birth: ,

Family status: Married to Jeanne H.M. Ingram since 1977

Education

1966 High school certificate, Athens

1970 Bachelor of Science in Physics, Massachusetts Institute of Technology

1972 Master of Science in Electrical Engineering, Massachusetts Institute of Technology

1977 Doctor of Philosophy (Ph.D.) in Economics, Massachusetts Institute of Technology

Professional career

1973 - 1975 Research Assistant and Teaching Fellow, Massachusetts Institute of Technology

1975 - 1984 Assistant and Associate Professor of Economics, Columbia University, New York

1980 Senior Economist, Federal Reserve Bank of Boston

1984 - 1985 Visiting Professor of Economics, Athens School of Economics and Business

1988 - Professor of Economics, University of Athens

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EN 1985 - 1993 Economic Counsellor (Chief Economist), Bank of Greece

1988 - 1993 Head of the Economic Research Department, Bank of Greece

1993 - 1994 Deputy Governor, Bank of Greece

1994 - Governor, Bank of Greece

Other posts

Member of the Governing Council of the European Central Bank (since January 2001) Member of the General Council of the European Central Bank (since January 1999) Governor of the International Monetary Fund for Greece (since October 1994) Member of the Council of the European Monetary Institute (1994 - 1998) Member of the Monetary Committee of the European Communities (1985-1988, 1990) Member of the Committee of Alternates of the Committee of the EC Central Bank Governors (1985-1993; Chairman 1989) Chairman of the Monetary Policy Sub-Committee of the Committee of the EC Central Bank Governors and, subsequently, of the Monetary Policy Sub-Committee of the Council of the European Monetary Institute (1992-1994) Chairman of the Governors’ Club, a forum comprising the governors of the central banks of sixteen south-east European and Asian countries (since January 2001) Member of the Trilateral Commission (since 1998) Member of Greece’s Council of Economic Experts (1985-1988, 1991-1994) Member of the Bid Committee for the Olympic Games – Athens 2004 (1996-1997) Member of the Board of Directors, Center for Planning and Economic Research (KEPE) (1987-1988) Member of the Scientific Council of the Greek Center of European Studies (1988-1989) Member of the Angelopoulos Committee which prepared the Report “Stabilisation and Recovery of the Greek Economy” (1989-1990) Member of the Padoa-Schioppa Committee which prepared the Report “Efficiency, Stability and Equity: A Strategy for the Evolution of the Economic System of the European Community” (1986-1987)

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EN Chairman of the Advisory Board of the Hellenic Observatory at the European Institute, London School of Economics (since 1998)

Decorations

Grand Commander of the Order of Honor, Greece (1999)

Publications

Author of numerous articles and essays, including:

"Targets for Monetary Policy in the Coming Year" (with Franco Modigliani), Brookings Papers on Economic Activity, vol. 1, 1975, pp. 141-165.

"Sequential Open-Loop Optimal Control of a Nonlinear Macroeconomic Model" (with M. Athans et al) in Frontiers of Quantitative Economics, vol. III, edited by M.D. Intrilligator, North-Holland, 1976.

"Monetary Policy for the Coming Quarters: The Conflicting Views" (with Franco Modigliani), New England Economic Review, March/April, 1976, pp. 2-35.

"Optimal Aggregate Employment Policy", Doctoral Thesis, Massachusetts Institute of Technology, 1977.

"Optimal Demand Policies Against Stagflation" (with Franco Modigliani), Weltwirtschaftliches Archiv, vol. 114, no. 4, December 1978, pp. 736-782.

"The Structure of Financial Markets and the Monetary Mechanism" (with Franco Modigliani) in Controlling Monetary Aggregates III, Federal Reserve Bank of Boston, October 1980, pp. 111-155.

"Maximum Employment Anti-Inflation Policy", Greek Economic Review, August 1981, vol. 3, no. 2, pp. 93-127.

"Inflation, the International Monetary System, and Macroeconomic Discipline" in R.E. Lombra and W.E.Witte (eds.), The Political Economy of International and Domestic Monetary Relations, Ames: Iowa State University Press, 1982, pp. 160-171.

Review of Rational Expectations and Economic Policy, edited by Stanley Fischer, in the Journal of Economic Literature, vol. 20, March 1982. A more extensive review article appears in Greek Economic Review, December 1981.

"Inflation, Financial and Fiscal Structure, and the Monetary Mechanism" (with Franco Modigliani), European Economic Review, vol. 21, 1983, pp. 203-250.

"Monetary and Credit Targets in an Open Economy" (with Franek Rozwadowski) in D.R.

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EN Hodgman (ed.), The Political Economy of Monetary Policy: National and International Aspects, Conference Series No. 26, Federal Reserve Bank of Boston. 1983, pp. 275-306.

"Money, Credit, and the Monetary Mechanism" (with Franco Modigliani), in M. De Cecco and J.P. Fitussi (eds.), Monetary Theory and Economic Institutions, London: The MacMillan Press, 1987, pp. 121-160.

Efficiency, Stability and Equity: A Strategy for the Evolution of the Economic System of the European Community (with T. Padoa-Schioppa et al.), Oxford and New York: Oxford University Press, 1987.

"Monetary Policy Coordination within the EMS: Is there a Rule? A Discussion" in F. Giavazzi, S. Micossi and M. Miller (eds.), The European Monetary System, Cambridge: Cambridge University Press, 1988, pp. 356-366.

"Economic policy in the European Community after 1992" in 1992: Legal, Economic and Political Dimensions, University of Athens and the European Parliament, Athens, 1989.

"The Supply of Money and the Control of Nominal Income" (with Franco Modigliani) in B.M. Friedman and F. H. Hahn (eds.), Handbook of Monetary Economics, Amsterdam: North-Holland, 1990. pp. 399-494.

Stabilisation and Recovery of the Greek Economy, (with A.Angelopoulos et al), Athens, 1990.

The European Monetary System in the 1990s (with Paul De Grauwe), London and New York: Longman, 1990.

"Greece and the EMS: Issues, Prospects and a Framework for Analysis" in P. De Grauwe and L. Papademos (eds.), The European Monetary System in the 1990s, London and New York: Longman, 1990, pp. 251-282.

External Constraints on Macroeconomic Policy: The European Experience (with G. Alogoskoufis and R. Portes), Cambridge: Cambridge University Press, 1991.

"The solvency constraint and fiscal policy in an open economy: Discussion" in G. Alogoskoufis, L. Papademos and R. Portes (eds.), External Constraints on Macroeconomic Policy: The European Experience, Cambridge: Cambridge University Press, 1991, pp. 68-74.

"Monetary Policy and Financial Markets in the 1990s" in T. S. Skouras, (ed.), The Greek Economy: Economic Policy for the 1990s, London: The Macmillan Press, 1992.

"Greece: monetary and financial system" in The New Palgrave Dictionary of Money and Finance, London : The Macmillan Press, 1992.

"European Monetary Union and Greek Economic Policy" in H.J. Psomiades and S.B. Thomadakis (eds.), Greece, the New Europe and the Changing International Order, New York: Pella Publishing Company, 1993, pp. 125-161.

"European Monetary Policy Coordination" in A. Bakker et al (eds.), Monetary Stability

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EN through International Cooperation, Dordrecht: Kluwer Academic Publishers, 1994.

"Growth with stability: The role of monetary policy", Economic Bulletin, Bank of Greece, vol. 5, March 1995, pp. 43-51.

"Inflation, interest rates and growth", The Greek Economy in 1996, Athens, pp. 113-120.

"Challenges for monetary policy on the road to EMU", Economic Bulletin, Bank of Greece, vol. 8, November 1996, pp. 63-75.

"The globalisation of financial markets and the conduct of economic and monetary policy", Economic Bulletin, Bank of Greece, vol. 10, December 1997, pp. 79-89.

"Greece and the euro" in Banking on the Euro, 9th Frankfurt European Banking Congress, November 1999.

"Monetary policy-making under uncertainty: central bank strategy and credibility" in Monetary policy-making under uncertainty, European Central Bank, Frankfurt am Main, December 1999.

"The Greek economy in the euro area", The Annual Lecture of the Hellenic Observatory, The European Institute, London School of Economics and Political Science, May 2000.

"From the drachma to the euro", Economic Bulletin, Bank of Greece, vol. 15, July 2000, pp. 7-14.

"Why price stability?" in A.G. Herrero et al (eds.), Why price stability?, Proceedings of the First ECB Central Banking Conference, European Central Bank, Frankfurt am Main, November 2000.

"The euro, the Greek economy and the banking system", Bulletin of the Hellenic Banking Association, vol. 24, 2001, pp. 5-13.

"The Greek Economy: Performance and Policy Challenges" in R.C. Bryant et al (eds.), Greece’s Economic Performance and Prospects, Bank of Greece and the Brookings Institution, 2001.

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EN Annex 2: Questions and answers

Answers provided by Lucas Papademos to the questionnaire drawn up by the Committee on Economic and Monetary Affairs of the European Parliament

A. Personal and professional background

1. Please highlight the three most important aspects of your professional experience in monetary, financial and business matters. My professional experience in monetary and financial matters relates to my career as a central banker and a professor of economics. The three most important aspects of my experience in these matters can be grouped as follows:

• Teaching and research. From 1975 to 1985, I taught economics at Columbia University in New York, mainly courses on macroeconomics, monetary theory and policy, and banking. At the University of Athens, where I have been a professor since 1988, I have taught courses on money and banking, economic and monetary policy as well as a course on European economic integration. My research and publications have focused on issues directly related to monetary policy, the structure of financial markets and the dynamics of inflation and employment. • From 1985 to 1993, I held the position of Economic Counsellor (Chief Economist) at the Bank of Greece, where I was involved in all aspects of economic analysis and monetary policy formulation. I was also Head of the Economic Research Department (1988-1993) and represented the Bank of Greece in various European and international committees on monetary and financial matters (please see my answer to the next question).

• Since October 1994, I have been Governor of the Bank of Greece, after having served as Deputy Governor since December 1993. In my capacity as Governor, I have been President of the Monetary Policy Council of the Bank and Chairman of the Committee on Banking and Credit. I have been directly involved in all monetary policy decisions aimed at attaining price stability in Greece and fulfilling other convergence criteria for joining Economic and Monetary Union. I have also overseen the process of financial deregulation and capital liberalisation as well as the changes in the banking supervision

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EN framework and practices in Greece over the past seven years and, more recently, the changeover to the euro.

2. Please highlight the three most important aspects of your European and international experience. My European experience stems from my membership in a number of committees of the European Community and of the European Union central banks. Specifically:

• From 1985 to 1988, I was a member of the Monetary Committee of the European Communities. From 1985 to 1993, I was also a member of the Committee of Alternates of the Governors of the EC Central Banks and served as Chairman of the Committee in 1989. The work of these committees focused on many aspects of European monetary and financial integration, including preparatory work for the Maastricht Treaty. • From 1992 to 1994, I was Chairman of the Monetary Policy Sub-Committee of the Committee of Governors and, subsequently, of the Monetary Policy Sub-Committee of the Council of the European Monetary Institute. During that period, the work of this Sub- Committee included the analysis of issues connected with the monetary policy strategy and operational framework of the future European Central Bank. • From 1994 to 1998, I was a member of the Council of the European Monetary Institute. Also, I have been a member of the General Council of the ECB since January 1999 and of its Governing Council since January 2001. My international professional experience includes: my work as a senior economist at the Federal Reserve Bank of Boston (while on leave from Columbia University in 1980); my position as Governor for Greece of the International Monetary Fund since 1994 and membership in the Economic Policy Committee of the OECD; and, since January 2001, the chairmanship of the Central Bank Governors’ Club, a forum comprising the governors of the central banks of sixteen southeast European and Asian countries.

3. What are the two most important decisions to which you have been party in your professional life? Could you explain your choice? As a central banker, I have taken or have been party to a number of important policy decisions. I have chosen two such decisions which have had a broad and fundamental impact on the economy and on the effectiveness of monetary policy.

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EN • As Deputy Governor, I was party to the decision to fully liberalize capital movements in Greece in 1994 without allowing the drachma to devalue, as was widely expected at the time; then I helped, by means of a stability-oriented monetary policy, to defend the currency successfully against a speculative attack. The significance of this decision is reflected in its many positive effects: first, the lifting of all capital controls was completed without undermining monetary stability; second, the credibility of central bank policy increased, thereby favourably influencing expectations and facilitating the adoption of the exchange rate as a nominal anchor; third, the whole episode contributed to a change in the stance of budgetary policy towards faster fiscal consolidation. • As Governor, I played a key role in the decision for the entry of the drachma into the Exchange Rate Mechanism of the European Monetary System in March 1998, which was accompanied by a devaluation of the currency. That decision, combined with other policy actions which ensured a smooth entry and participation of the drachma in the ERM, had various important consequences: it provided a timely exit from the strategy pursued for three years of unilaterally pegging the exchange rate, when that peg could no longer be sustained, and it placed the Bank’s disinflation strategy within a new institutional framework, which provided additional discipline and enhanced policy credibility. More generally, it marked the beginning of the last phase of Greece’s nominal convergence efforts to achieve price stability and was crucial for the fulfilment of the exchange rate and inflation criteria for the adoption of the single currency.

4. Do you have any business or financial holdings or other commitments that might be in conflict with your prospective duties, and are there any other relevant personal or other factors that need to be taken account of by the Parliament in considering your nomination? I do not have any business or financial holdings or commitments that might be in conflict with my personal duties. I am not aware of any personal or other factors which should be taken into account by the European Parliament in considering my nomination. I am currently on leave from the University of Athens. I intend to perform my duties at the ECB on a full-time basis as specified by its Statute.

5. On the basis of your own experience and philosophy, and in view of the uniquely independent position of the ECB, what do you believe should be the guiding principles for a European Central Banker? A first, general guiding principle for a European Central Banker is to be totally committed to the achievement of the objectives and to the effective performance of the tasks of the ECB

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EN and the ESCB, as specified in the Statute. To this end, a second important principle is to act independently from political or other bodies when carrying out his/her tasks. A third principle is accountability to the European public for policy decisions and the performance of duties. A fourth principle, which is related to the previous one, is transparency. Monetary policy decisions must be explained to the public so that they are understood as contributing to the attainment of the policy objectives, given the available information. In particular, transparency enhances the effectiveness of monetary policy in achieving its primary objective to maintain price stability in the euro area. A fifth principle is to act in the general interest of the euro area as a whole. A European Central Banker’s decisions must be based on a European perspective and not a national one. Sixth, collegiality in the functioning of the decision making bodies of the ECB. Without limiting freedom of expression on policy matters, collegiality strengthens decision making and the effectiveness of central bank policies. Finally, observing the highest standard of ethical conduct, acting honestly and impartially, and avoiding situations which could give rise to a conflict of interests are also important principles. Abiding by the above guiding principles is necessary for the effective performance of the duties of a European Central Banker and for maintaining and promoting public trust in the European Central Bank.

B. Monetary and economic policy

6. Which is your position as to the current definition of price stability used by the ECB? Do you believe that this is the right approach and why? I believe the ECB’s definition of price stability provides an appropriate quantification of the primary objective of monetary policy in the euro area. In this sense I fully support the decision on this definition which was taken by the Governing Council of the ECB in October 1998. The basic rationale behind the ECB’s choice was also clearly explained in a letter by the President, Mr. Duisenberg, to the Chairperson of the Economic and Monetary Affairs Committee, Ms Randzio-Plath, dated 16 October 2001. I would in particular like to stress the following points: First, the ECB's definition matches the clear demand of European citizens for low inflation and it is consistent with the objectives of many central banks in the euro area before Stage Three of EMU.

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EN Second, the definition of price stability in terms of a range recognises the uncertainty inherent in monetary policy-making and thereby avoids giving the impression of spurious accuracy in the ECB’s ability to fine-tune price developments. Third, the definition serves well the function of steering long-term inflation expectations. Fourth, neither prolonged inflation nor prolonged deflation are consistent with the ECB’s definition of price stability. Moreover, the definition provides for a safety margin against the specific risks associated with deflation. It also acknowledges the possible existence of a small positive bias in measuring inflation by the HICP and the uncertainty regarding its magnitude. Finally, the notion that “price stability is to be maintained over the medium term” provides an appropriate framework for the ECB’s accountability as it acknowledges the lags in the transmission of the effects of monetary policy and the existence of shocks to inflation which monetary policy cannot offset in the short run. Conversely, the medium-term orientation gives the ECB the flexibility to respond appropriately to economic shocks, thereby avoiding the introduction of unnecessarily high volatility in real activity and interest rates.

7. Would you support the ECB basing the second pillar of its monetary strategy on an explicit inflation forecast, and if so, over what time period, rather than just using staff projections? To what extent could a mixed targeting strategy (inflation target + money supply target) be defined and evaluated? Macroeconomic projections are an important piece of information that the Governing Council analyses under the second pillar of the ECB’s monetary policy strategy. They represent a useful tool for consistently organising a large body of economic data and help to build an overall picture of possible future developments. As such, I fully support their use and regard their publication as important in order to enhance the transparency of the monetary policy process. However, I do not favour making macroeconomic projections and the adoption of an explicit inflation forecast the unique or all-encompassing tool for the conduct of monetary policy. There are a number of drawbacks associated with projections that one should always bear in mind. In particular, projections are generally model specific, i.e. their outcome is very much based on a model that, by its very nature, cannot offer a complete representation of economic reality, are surrounded by considerable uncertainty and can hardly take into account all available information in a timely manner. A diversified and comprehensive analysis of all available information, underlying the ECB’s approach, is more appropriate. For this reason, I subscribe to the views of the ECB on this matter.

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EN Moreover, I deem it important that, within the ECB’s framework, there exists a clear separation of the preparation of projections, as carried out under the responsibility of the staff, from the monetary policy decisions taken by the Governing Council. I believe this separation enhances the usefulness of staff forecasts as an input in the decision-making process and the transparency of the overall monetary policy framework. There is no reason, in my view, for the Governing Council to take responsibility for the projections. In addition, the Governing Council must feel free to use the projections of others rather than the staff projections as input for taking policy decisions. Finally, I would not support the adoption of a mixed strategy combining an inflation target and a money supply target. Indeed, such a strategy is not feasible in an uncertain economic environment. Adoption of such a strategy would merely cause confusion and would hardly provide a transparent framework. Rather, I believe that the ECB in pursuing its primary objective should look at all available information, in a forward-looking manner, in order to derive the best assessment of the outlook for inflation. Under this set-up, the analysis of monetary developments is one useful ingredient, as is the setting of a reference value for M3 (and not a target for M3) indicating the rate of M3 growth which would be compatible with price stability over the medium term. Given that variables other than M3 also have information content regarding future price developments, a diversified approach, which looks at a variety of indicators and also takes into account possible alternative interpretations of the available information, is more conducive to robust monetary policy decisions than the mere focus on M3.

8. Assuming price stability has been achieved and can be maintained, what would you consider to be the appropriate interest rate policy, and in which way and to what extent would this take into account the need (pursuant to Article 105 of the Maastricht Treaty) to achieve the goals of Article 2 and 3a concerning growth and a high level of employment? Before answering the first part of your question, I should like to address the issues outlined in the second part. The Treaty has assigned the ECB the primary objective of maintaining price stability and, without prejudice to this objective, the support of the "general economic policies in the Community”. The ECB’s monetary policy closely reflects this mandate. The best contribution of monetary policy to sustainable and high levels of growth and employment is to maintain price stability over the medium term. Furthermore, a monetary policy focused on price stability can contribute to stabilising output and employment for a wide range of shocks (mainly on the demand side). Moreover, a medium-term orientation in the conduct of monetary policy can avoid introducing

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EN unnecessary volatility in output and employment by allowing for a measured and gradual response to some type of economic shocks (e.g. supply shocks of a cost-push nature). Beyond its contribution to growth via the maintenance of price stability in the medium-term, monetary policy cannot do very much, if anything, to increase economic growth and employment in a sustained and systematic way. I am convinced that further improvements of growth and employment prospects must rely on policy measures and reforms which will enhance productivity and the functioning of markets. Particularly important are structural reforms which improve the flexibility and efficiency of labour and goods markets. As regards the first part of your question, you ask me how interest rates would be set “assuming price stability … can be maintained”. However, the task of the Governing Council of the ECB, is to set the key ECB interest rates in a way that price stability can best be maintained in the future. This would serve other policy objectives as well. It cannot be assumed that price stability is given, thus allowing other objectives to be pursued independently.

9. How would you seek to resolve the policy mix problems resulting from the combination of a centralised monetary policy and decentralised fiscal policies? Potential “policy mix” problems in the euro area can be resolved. Responsibilities are clearly defined and policy-makers have the incentive to focus on their own specific responsibilities. Furthermore, there are many appropriate means for the exchange of information. The Treaty assigns to the ECB and to the single monetary policy the primary objective of maintaining price stability in the euro area. The Treaty and the Stability and Growth Pact have laid down important principles and fiscal and budgetary rules to discipline national fiscal policies. The Treaty finally requires the Member States to regard all aspects of their economic policies as a matter of common concern and to co-ordinate them in the context of the BEPGs, even though the responsibility for structural policies rests to a large extent with the Member States themselves. Within this institutional framework conflicts and overlaps in competence and responsibility in the management of the single monetary policy and in the design of fiscal and structural policies are avoided in general. For good reasons, the Treaty rules out ex-ante co-ordination of fiscal and monetary policy, focused for example on achieving a certain policy mix. Such a co-ordination would risk creating uncertainties in the public regarding the policy objectives of the different institutions. It may distract national governments from carrying out their own responsibilities. Moreover, any real or perceived political pressures on monetary policy to facilitate or “reward”

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EN developments on the fiscal and structural side with reference to a “desirable policy mix” would raise uncertainty about the objectives of monetary policy, thereby endangering credibility and reducing the benefits associated with the maintenance of price stability. This notwithstanding, on the basis of its mandate and in full recognition of its independence, there are good reasons for the ECB to conduct a regular exchange of views and information with the policy-making bodies of the European Union. The ECB has a natural interest in being informed about fiscal and structural policy measures taken in the euro area, as these may also influence price developments and the transmission mechanism of monetary policy. Monetary policy will, of course, take euro area-wide fiscal and structural policies into account. In the same way, fiscal policies should take into account the course of monetary policy in their efforts to achieve their objectives.

C. Functioning of the ECB

10. Which reforms should ECB undergo in view of enlargement? Over the past few months, the ECB’s decision-making bodies have discussed modifying voting modalities in the Governing Council on various occasions. The Governing Council intends to make its recommendations on a change to its voting modalities in accordance with the “enabling clause” as and when appropriate. It is worth noting that the ECB was called upon to do so as soon as possible once the Nice Treaty is ratified (which can be expected in early autumn, assuming the second Irish referendum is successful). In establishing a suitable change, the legal limits of the enabling clause (i.e. that it is restricted to modifying the voting modalities) must be borne in mind. In addition, the ECB considers it advisable to respect a number of fundamental principles which are stipulated in the Treaty and the Statute of the ESCB and the ECB. These principles have formed the basis for the Governing Council’s successful conduct of the euro area’s monetary policy thus far (ad personam participation of Governing Council members – “one member, one vote” – with regard to members with voting rights). The respect of these principles would seem to exclude certain adjustment options, such as a constituency system, while leaving open others such as a rotation system. Any rotation system to be designed should ideally be stable vis-à-vis future euro area enlargements. It should also be relatively easy to communicate and contain safeguards against outcomes where the group of Governing Council members exercising the voting rights

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EN could be perceived as not being sufficiently representative of the euro area as a whole.

11. Would you be in favour of a confirmation procedure by the European Parliament? The establishment of a parliamentary confirmation procedure would require a change in the Treaty. As such, it raises a question of constitutional nature, vesting an additional power in the Parliament, that pertains to the Member States to respond. Neither the ECB nor myself have a position in this regard. The candidates for the Executive Board, under either the option of consultation or that of confirmation, need to be examined by the European Parliament, and I would expect that a negative opinion of the European Parliament (or, for that case, of the Governing Council of the ECB), even if not legally binding, would have a serious impact on the decision to be taken by the Heads of State or Government. Therefore, whether the European Parliament is consulted or is called upon to approve a candidate may not, in practice, lead to a very different outcome.

12. According to the current distribution of responsibilities among members of the ECB, the Vice-President is, in addition to his statutory duty as deputy to the President, in charge of the Administration and Personnel. What will be your personal approach of the social dialogue with the ECB Staff? How do you envisage the possibilities to promote an equal opportunities policy in the ECB, in particular at the managerial level? I do believe that a well-functioning dialogue with the staff is essential for creating and maintaining a good working atmosphere in an organisation. Such a dialogue should be maintained at many levels within the organisation. However, any dialogue must respect the fact that the parties engaged in it have different roles. More concretely, a dialogue between management and staff cannot succeed if their different roles are not recognised and staff representatives want to assume management responsibility. It can also not succeed if the management is not prepared to genuinely engage in a dialogue but see the dialogue only as a necessary formality. As regards equal opportunities, I have no reason to believe that the ECB recruitment policy involves gender discrimination. That being said, I would certainly not want to state that the ECB has as many female staff at managerial level as ideally would be desirable. I would therefore look to see whether this issue should be given a more prominent place on the agenda.

13. Are you of the opinion that the working conditions (and staff rules) of the ECB’s employees should be negotiated with the staff committee? Which other modifications

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EN are necessary in your view to bring these working conditions (and staff rules) in line with those of other European institutions? As I understand, the role of the Staff Committee in the ECB as a body elected by the whole staff is of a consultative nature. As such, the Staff Committee is consulted on the conditions of employment in the ECB. In my view, it is not a natural negotiating party, a role that I would associate with a trade union. According to the Statute, the conditions of employment of ECB staff are determined by the Governing Council upon a proposal from the Executive Board and with the benefit of comments from the members of the General Council. As a member of both the Governing and General Councils, I have contributed to the decisions taken in that respect and fully support them. As the employment and working conditions at the ECB correspond to international labour standards in all respects and the rights of staff and trade unions are respected, I do not see any reason for modification at the current juncture. It is, however, clear that working conditions at the ECB need to be monitored closely so as to ensure that, in a rapidly changing environment, the ECB remains an attractive work place, that it continues to be competitive with other international organisations and that it secures the human resources required, both in qualitative and quantitative terms, to fulfil its statutory functions and tasks. As a prospective member of the Executive Board I will certainly attach great importance to these aspects.

D. Democratic accountability

14. How do you see the distinction between the ECB independence and its accountability and what steps do you consider should be taken to ensure democratic accountability? Independence and accountability are two sides of the same coin. The independence of the ECB – as enshrined in the Treaty – is crucial for the success of the single monetary policy. It enables monetary policy decisions to be separated from the political cycle and ensures that the objective of price stability is consistently pursued. As such, this principle is well established and fully recognised not only by politicians, but also by the citizens of our countries. However, independence does not mean that the ECB, or the Eurosystem for that matter, can do whatever it wishes. Independence is complemented by the principle of accountability. The citizens, or elected representatives on their behalf, are entitled to follow and to scrutinise ex post the decisions taken by the ECB in the fulfilment of its tasks. This obligation to explain

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EN and justify monetary policy decisions is an important element in legitimising the ECB’s independence. In order to enable the European Parliament in particular, but also the public at large, to assess the ECB’s performance against its tasks, the ECB has implemented several steps which even go beyond the statutory reporting requirements. Apart from the President presenting the ECB’s annual reports to the plenary session of the European Parliament, the quarterly testimonies of the ECB President before the Economic and Monetary Affairs Committee are a particularly important element of the ECB’s accountability. At these meetings the ECB President explains the ECB’s policy decisions and thereafter answers questions posed by members of the Committee. Other members of the Executive Board of the ECB also appear before the Committee. Furthermore, the ECB answers – on a voluntary basis – questions from MEPs in writing. In addition to the direct communication with the political decision-making bodies at the European level, the ECB pursues a transparent communication policy vis-à-vis the public at large. Immediately after the Governing Council’s decision on the monetary policy stance, the President addresses the public by means of a press conference in which he explains the rationale behind the decisions taken. These explanations are supplemented in greater detail by the ECB’s Monthly Bulletin. For their part, the members of the Governing Council, who are also national central bank governors, regularly explain the decisions taken by the ECB at the national level. Although not directly linked to the principle of accountability, it is noted that the ECB has contacts with all relevant policy institutions involved in the European political process. The ECB President and another Executive Board member regularly participate in the meetings of the Eurogroup and ECOFIN Council and, in return, the President of the ECOFIN Council and a member of the European Commission are entitled to attend the meetings of the Governing Council of the ECB. The ECB’s participation in the Macro-economic Dialogue should also be mentioned in this context.

15. If the European Parliament were to recommend rejection of your nomination, would you still wish to pursue that nomination? First, let me clarify that I have not pursued my nomination. According to the Treaty, the final decision is to be taken by the Heads of State or Government who would have to assess the Parliament’s opinion addressed to them. As I noted in my answer to question 11, an unfavourable opinion of the European Parliament on my nomination by the EU Council would have a serious impact on the decision to be taken by the Heads of State or Government. I would also examine carefully the arguments put forward against my nomination and I would

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EN act with the deepest respect for the opinion of the institution that represents the political will of the citizens of the Union.

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Annex 3: Opening statement of the candidate

Introductory Statement by Mr. Lucas Papademos candidate for Vice-President of the ECB

Brussels, 22 April 2002

It is a great pleasure for me to appear before your Committee for this hearing which is part of the process of my nomination to the Vice-Presidency of the European Central Bank. I am extremely honored to have been proposed by the EU Council for this position. In my introductory statement, I will first focus on the objectives and the role of the ECB. Then, I will address a number of issues and principles relating to the conduct of monetary policy, including its communication and accountability. The Treaty clearly states that the primary objective of the ECB is to maintain price stability in the euro area. The unambiguous priority given by the Treaty to this objective partly reflects the inflation experience during the previous decades and the economic and social benefits that price stability entails. These benefits are appreciated by the European public, which at times has suffered the consequences of inflation, including the costs of restoring stability lost as a result of misguided policies. The assignment of price stability as the primary objective of the ECB also relates to the fundamental role of monetary factors in determining the price level in the long run. Monetary policy conducted by an independent central bank can effectively provide a nominal anchor to pin down the price level. Price stability is not, of course, the only important economic policy objective. Attaining sustainable and non-inflationary growth and a high level of employment are other important goals. The ECB is required to support the general economic policies in the Community with a view to contributing to the achievement of these goals, provided that price stability is not jeopardized. In my view, the maintenance of price stability and the attainment of sustainable growth and high employment are not conflicting but complementary objectives in the long run and, in general, over the medium term as well. The monetary policy strategy of the ECB takes into account both parts of the ECB’s mandate and contributes to the achievement of the real economic goals of the Community. Let me briefly elaborate on the previous two statements. There is broad consensus that maintaining price stability contributes, through a variety of channels, to establishing conditions conducive to output and employment growth in the long run. In addition, it protects society from the arbitrary redistribution of income and wealth resulting from unanticipated inflation, thus fostering social cohesion. But, maintaining price stability over the medium term can also help, in general, to limit undesirable output and employment volatility. The contribution of monetary policy in stabilising output and employment fluctuations over the medium term depends on features of the central bank’s strategy as well as on the credibility of its commitment to price stability.

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EN The ECB’s monetary policy strategy with its forward-looking, medium-term orientation and its quantitative definition of price stability contributes to the stabilisation of output and employment in various ways. Monetary policy decisions do take into account the evolution of output and other real variables in assessing inflation prospects. The medium-term orientation implies a gradual response to certain shocks, particularly on the supply side, to avoid inducing undesirable large output fluctuations. And the definition of price stability helps anchor expectations, influencing favourably short-term inflation – output dynamics. Thus, monetary policy can contribute to the attainment of the Treaty’s wider objectives in

parallel with the pursuit of its primary goal, in the long run and over the medium term.

Monetary policy, however, can not influence directly potential growth and long-term

employment creation. The bulk of empirical evidence supports the theoretical proposition

that money is “neutral” in the long run. Sustainable output and employment growth can be

effectively pursued by policy measures and reforms which increase productivity and

improve the functioning of labour and product markets. Improved productivity and labour

market efficiency in the euro area will also enhance the effectiveness of monetary policy in

achieving its primary objective and will reduce output volatility.

The effective pursuit and maintenance of price stability requires that the ECB should be fully independent in its decision-making. Independence is essential for safeguarding monetary policy from political pressures to focus excessively on the short-run economic situation. It is also required in order to fend off requests to focus on objectives that monetary policy cannot effectively achieve or to accommodate the undesirable side-effects of other policies on financial and product markets. Moreover, in a monetary union, independence also shields the central bank from national pressures in its conduct of the single monetary policy which aims at ensuring price stability in the euro area as a whole. In all these cases, interference would undermine the central bank’s medium-term orientation and its ability to maintain long-term price stability. For all these reasons and because the empirical evidence clearly shows that there is a positive correlation between the degree of central bank independence and the effectiveness of monetary policy in securing low inflation, the ECB’s independence was enshrined in the Treaty. The European Parliament, in particular, has advocated and supported the independence of the ECB. Like all other members of the decision-making bodies of the ECB, I am committed to act in accordance with this important principle. Independence does not imply that the ECB is not accountable for its policy decisions. On the contrary, transparency about policy actions and accountability for its performance to the European citizens and their representatives in the European Parliament are necessary both for enhancing the effectiveness of monetary policy and for legitimising the ECB’s independence. Moreover, a fruitful dialogue between the ECB and all relevant economic policy-making bodies and institutions of the Union (e.g. the Commission and the Eurogroup) is also essential. An exchange of views and information between the ECB and other policy-

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EN making bodies about the economic situation and prospects and a better understanding of the fiscal and structural policies to be pursued in the Union provide useful input for monetary policy decisions. Transparency about policy decisions is a vital ingredient of monetary policy-making. By explaining and justifying policy decisions so that they are clearly understood by the public and the financial markets, we can influence the expectations of economic agents in a way which facilitates the transmission of policy effects and the attainment of policy goals. On the whole the ECB communicates actively and extensively, through a variety of channels, with the aim to ensure a high degree of transparency about its policies. It provides ample information for the assessment of its performance by the European public. Its accountability to the European Parliament involves not only presentation of various reports but also a continuous and active dialogue between this Committee, the President of the ECB and other members of the Board. I believe it is important to enhance this constructive dialogue. Since its establishment the ECB has achieved a high degree of price stability in the euro area. This was accomplished in an environment marked by large supply shocks and high volatility in foreign exchange and financial markets. More recently, the ECB has succeeded in managing and coordinating the smooth changeover to the euro, a historically unique and complex undertaking. These achievements make us confident that the ECB will continue to meet its objectives and perform its tasks efficiently in the future. In my new capacity I intend to use my professional experience and devote all my energy to the success of this effort. In my introductory statement I have chosen not to speak in my native language so as to underline the supranational character of the ECB and to facilitate communication. I would like, however, to finish with a quote from Aristotle regarding the value of money. In his Politics (Book I, 1257 B10), he states: “Oτέ δε πάλιν λήρος είναι δοκεί το νόµισµα και νόµος παντάπασιν φύσει δ’ουθέν, ότι µεταθεµένων τε των χρωµένων ουθενός άξιον, ούτε χρήσιµον προς ουθέν των αναγκαίων εστί και νοµίσµατος πλουτών πολλάκις απορήσει της αναγκαίας τροφής”. This text can be freely translated as follows: “If those who employ a currency system choose to change the agreements upon which it is created, the currency ceases to have its value and although one could have plenty of money one could no longer use it to procure the necessities of life”. This quote shows that the value of money has been a major concern since ancient times. The overriding responsibility of the European Central Bank is to achieve its primary objective and secure the purchasing power of our single currency in the euro area. By doing so, it contributes in a fundamental way to the long-term growth of real incomes and employment and, more generally, to the social and economic welfare of the citizens of Europe. Thank you very much for your attention.

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