The economies of the new EMU members will more closely resemble that of Ireland than that of Germany or other core Euroland nations. They are small, with high growth and high structural inflation. The Governing Council thus risks becoming divided between a dozen or more high-growth, high-inflation "Irelands" and a handful of "core" nations, with the Irelands having enough votes to set interest rates while accounting for only 20 percent of Euroland’s output.

Enlargement will weaken the relative power of the body’s leaders, namely, the president and Executive Board. Enlargement without reform would create an opportunity for coalitions formed by EMU members with less synchronized economies to prevail and set interest rates for the whole area. Enlargement might also induce a status quo bias, making reacting to significant changes in the macroeconomic climate more difficult.

The ECB and/or the European Commission should give top priority to formulating a response to this challenge. The urgency arises because even medium-term challenges can have an immediate effect when such challenges are predictable. Every day financial markets must price 10-year euro debt instruments with an eye to future monetary policy, which, ultimately, depends on the ECB’s decisionmaking structure. Therefore providing clear indications that the ECB’s numbers problem will be solved is important.

Even though ECB reform was not on the Nice agenda, European Union (EU) leaders at the Nice summit recognized that ECB reform is a precondition for enlargement. Article 5 of the Nice Treaty (the so-called enabling clause) enables the EU to modify the ECB’s decisionmaking procedures without convening a new intergovernmental conference. Given how the final deal was handled in Nice, this was probably a wise strategy. ECB reform is too important to be thrown into a big, political horse-trading pit. A declaration annexed to the treaty indicates, however, that this matter should now be dealt with rather urgently: "The conference expects that a recommendation … be presented in the shortest delay possible."

At a June 21, 2001, press conference in Dublin, ECB President Wim Duisenberg acknowledged that a problem exists, but suggested that the process of solving it could wait. In response to a question about ECB reform proposals, the president said: "We will come with suggestions in that respect [solving the numbers problem] as soon as the Nice Treaty has been ratified by all the parliaments, including of course the Irish Parliament, and we hope that at some time that will happen. At least that is my personal hope."

Waiting for ratification would be a mistake. While the enabling clause cannot be employed before the Nice Treaty enters into force, this is not a reason for postponing the discussion and study of reform options, and much less a reason for keeping such preparations secret. Ratification might not come before June 2002, and this is too long to wait, not only because ECB reform might become entangled with the eastern enlargement process, but also because admitting the existence of a problem but failing to initiate a solution is a sign of weak governance.

There are three leading contenders for reforming the Governing Council’s decisionmaking rules: rotation, representation, and delegation. Both rotation and representation have shortcomings: neither of them is likely to lead to appropriate monetary policy decisions. Best practice in central banking strongly argues in favor of delegation to an independent committee.

The EU has clear supranational executive power in only two areas: competition policy and monetary policy. In the case of competition policy, the power is delegated to a committee—the European Commission—and decisions are made without formal consultation with either the Council of Ministers or EU members in general. Delegating interest rate decisions to a committee is thus consistent with both best practice in central banking and current EU practice.

The committee in charge of monetary policy decisions should include the six members of the Executive Board plus a few non-Executive Board members. Our preferred membership of such a committee is 11: 6 Executive Board members and 5 nonmembers.

However, removing national central bank governors from the Governing Council has a cost. National central bank governors have credibility in the eyes of their fellow citizens. They are typically viewed as eminent citizens in touch with national sensitivities. Cutting them out of the ECB process entirely might seriously weaken its accountability and political acceptability. To redress this, and to ensure that the full range of monetary conditions has a voice, we suggest that the views of central bank governors could still enter the process, but only as information that committee members use to reach their decision. The governors would continue to be part of the Governing Council, but as far as monetary policy decisions are concerned, this would become a consultative body that ensures that the governors can continue to function in the role of national listening posts.

If ECB reform is an urgent matter, who has the right incentives to put a proposal on the table? The Nice Treaty requires the ECB to act unanimously in making its recommendation, but national central bank governors are unlikely to reach unanimous agreement about any of the solutions outlined here (rotation, representation, and delegation to a committee). As in the case of the composition of the European Commission, many national central bank governors will balk at giving up their vote in the council, even temporarily, as they would have to do in a rotation system. Representation along International Monetary Fund lines is also likely to run into political problems. The current members might agree on the proposal to group the new entrants (though none of the current members) in a couple of constituencies carrying one vote each, but designing a rule that gives a permanent vote to Ireland, but not to Hungary, is impossible. In any case, this would not avoid swelling the composition of the Governing Council, and at the same time it would break the rule whereby governors vote as individuals, not as representatives of a member central bank. The ECB is thus likely to experience deadlock for any reform proposal, with big-member versus small-member schisms at the forefront.

Fortunately, the Nice Treaty allows the European Commission to propose a reform, and we encourage the Commission to do so. The Commission decides by a simple majority, so it will find it easier to come to a decision. Moreover, the commissioners oversee the interests of all EU institutions, including the ECB, and the nature of ECB reform will surely have implications for other EU institutions. EU leaders entrusted the Commission with the responsibility of making sure that a recommendation reaches the Council "in the shortest possible delay." This implies that the Commission may find itself in the position of having to put its own proposal on the table. We recommend that the Commission prepare for such a possibility.