TUESDAY 16 JUNE 1998

PROFESSOR WILLEM BUITER

  220.  Professor, as you know one of the tasks the Committee has is to assess the experience and independence of people like yourself. I wonder if you could therefore tell me about the work you did as the Senior Adviser to the Chief Economist at the European Bank for Reconstruction and Development in 1996 and how did you divide your time at that time with the other task you had which I understand was as a member of the Panel of Independent Advisers to the Parliamentary Group of the Party of European Socialists? Can you tell us if this is quite a respectable organisation and what they were involved in? My final question is on the many things you have written can you tell us a little to enlighten the Committee in its knowledge about the paper which you submitted to the House of Lords in the same year, 1996, which was entitled Two Cheers for EMU. What was that all about?
  (Professor Buiter)  Let me try and take them in order.

  221.  The reconstruction.
  (Professor Buiter)  I worked almost immediately after coming back from the United States to this country a day a week at the European Bank for Reconstruction and Development here in London as an Economic Adviser to the Chief Economist there. I was just giving macro-economic back-up to their policy advice for the operation of this particular international financial institution.

  222.  So it is an international financial institution, is it?
  (Professor Buiter)  It is the European Bank for Reconstruction and Development here.

Chairman:  Set up by Mrs Thatcher.

  223.  It is an international bank?
  (Professor Buiter)  It is an international bank. It is the regional development bank for Eastern Europe. It is an official multi-national agency.

  224.  For Eastern Europe?
  (Professor Buiter)  For Eastern Europe and the former Soviet Union.

  225.  So what did you tell them about, what kinds of things?
  (Professor Buiter)  About the phasing of reform, to what extent structural reform should precede or coincide with macro-economic stabilisation, the importance of all the things that we take for granted here. How to create a market economy in a system where previously the only markets were grey, black and highly suppressed. How to conduct monetary and fiscal and exchange rate policy in countries where many of the institutions that we take for granted here did not exist.

  226.  And they were giving advice to the governments as to how to do that?
  (Professor Buiter)  They are a bank, a development bank. They make loans mainly to private or semi-private institutions in the borrowing countries. These loans are of course conditional on risk assessments that powerfully include assessments of the overall macro-economic situation. Individual project loans are unlikely to get repaid if the country as a whole is going to the dogs.

  227.  That is fine. What about this Parliamentary Group of the Party of European Socialists? Is that quite a respectable organisation?
  (Professor Buiter)  I do not know whether you would view it as respectable but it is a grouping of Social Democrat Socialist MPs in the European Parliament.

  228.  Oh, I see, the European Parliament.
  (Professor Buiter)  I think I went to two meetings in Brussels dealing with various aspects of relations between the ins and the outs and EMU and Eastern European accession.

  229.  I see. In this paper to the House of Lords, Two Cheers for EMU, what kind of message were you giving to them because, unfortunately, I am not in the House of Lords?
  (Professor Buiter)  Okay. It was a message that basically said the benefits and costs of EMU membership had both been exaggerated and on balance the benefits were likely to outweigh the costs.

  230.  It was a great idea?
  (Professor Buiter)  No, a reasonably good idea.

Mr Clarke:  The Labour Party is a member of the Party of European Socialists, Chairman, as I think you know, and it is the body of the parties not just in the European Parliament who work together in that context.

Sir Teddy Taylor:  So it is not just the European Parliament?

 Mr Clarke:  No. The European Socialists is the body of all Labour and Social——

Sir Teddy Taylor:  Professor Buiter said it was the European Parliament.

  231.  The Party of European Socialists is the grouping in the European Parliament of MEPs but it is more than that, it extends more widely.
  (Professor Buiter)  I advised the parliamentary wing of that.

Mr Clarke:  My question to you is about Europe. As I said to Mr Clementi earlier, I am relying in a rather low way upon the cuttings which come through and one of your academic colleagues said that you were described as a "wild card". "Willem is a federalist, who will argue vociferously that sterling should join EMU, whatever the underlying fundamentals, ... He may be on board in part to reassure Brussels that Britain remains serious about monetary union." Would you like to comment on this?

Sir Teddy Taylor:  Very worrying.

Mr Clarke:  This is a serious suggestion because obviously if you are prepared to argue for a position whatever the underlying fundamentals it raises questions about you.

  232.  Just like a religion.
  (Professor Buiter)  I certainly am a European federalist. The notion that I would recommend Britain joining regardless of economic fundamentals is completely nonsensical.

  233.  Thank you. The second point I want to make is one that I discussed with Professor Goodhart this morning. Again another of these colleagues: "Some people have been surprised by the number of jobs he manages to hold down at any one time." I think this is a serious issue for the external members, the academics, about your freedom to speak about wider issues in a general way. Professor Goodhart this morning mentioned EMU and he mentioned one or two other matters and you mentioned the fiscal code and the way that numbers are pursued, about the signals that come from your remarks on those wider questions about how you are likely to behave on the MPC. I wonder if you have thought about any potential conflicts of interest that can arise in that context and how you deal with those?
  (Professor Buiter)  Clearly there should be no professional conflicts of interest. As soon as I joined the MPC I gave up everything except Cambridge and as of 1 July I have taken a two year leave of absence from Cambridge because I found I could not combine a serious involvement in Cambridge with doing the job on the MPC properly. That is all I will be doing. In that sense there is no conflict whatsoever. In terms of speaking out on wider issues, in my case they would be very much like Charles Goodhart, EMU, on which I have spoken out, like many others on the MPC for that matter, and also on budgetary issues. I think as long as it does not prejudge my behaviour in terms of the conduct of monetary policy I feel I and other members ought to be free to write and speak out as we wish. That is a test in some sense of our independence.

  234.  I understand that and I accept the point, I think it is a legitimate point, but nevertheless there are issues when you speak on issues like EMU or the fiscal code or whatever that have an impact on monetary policy.
  (Professor Buiter)  I fully grant that point. I cannot speak out on things that would hint at my future interest rate decisions. And in economics, just like history, it is a seamless web. It is hard to find things that could not under any circumstances hint at that. The kinds of statements I have made in this little note that you have referred to about the Golden Rule, if anybody can distil from that my likely future performance on the Committee I would like to know. There is no conflict there. I am very much aware of the fact that there are areas where one could create ambiguities but that could be avoided. Simply because things are controversial or unpopular is no reason for not dealing with them as long as it does not interfere with the proper functioning of the MPC in its Government assigned task.

  235.  I fear my question is going to be far less entertaining than your previous answers! In the minutes of the previous MPC, the ones we just now have, there is an echo of something that is developed at length in your replies to the questionnaire to this Committee. I just want to see if I can match the two up. The Committee discussed whether it was anticipating a rise in public sector earnings growth to bring public sector earnings growth into alignment with the, at that stage, far higher private sector earnings growth. This of course, as we have heard from the answers given by previous members of the MPC, must be of some significance. So the eye of the world, in a sense, is being brought to bear on that particular point. Clearly there was a feeling in the Committee that public sector earnings growth was going to rise. Was that your view?
  (Professor Buiter)  I think the minutes reflect our concern that there is a serious risk that the gap between earnings growth in the private sector and the public sector is unlikely to be sustainable indefinitely and that its closure is more likely to occur through public sector earnings crawling up to the private sector level than private sector earnings coming down to the public sector level. It is a risk. It is not an expectation, in a sense, but it is a serious risk. We have seen these differentials growing and in a labour market that overall is tight it becomes very hard to segment earnings development in what are really connected segments. I think it is remarkable that earnings growth in the public sector has been kept consistently below that in the private sector for so long but it is a risk, let me put it this way, that this will not continue.

  236.  So when the minutes say that five per cent plus growth of private sector earnings was a better indicator of labour market tightness than the headline rate of 4.5 per cent, you would certainly be a member of the Committee who took that view?
  (Professor Buiter)  I would agree with that, yes.

  237.  I have really enjoyed your answers so I am going to ask a question too. It is about your pamphlet, Notes on `A Code for Fiscal Stability'. Everybody is concentrating on the Golden Rule but there were two points in your pamphlet, the second one was the desirability of constructing a more comprehensive balance sheet of public sector assets and liabilities. I am really pleased that you have read the economic and fiscal strategy report that some of your colleagues have not got round to yet. Do you think that those points you made about a more honest and open balance sheet, a more meaningful one, perhaps have been taken on board in this document when it speaks of financial transactions being shown?
  (Professor Buiter)  Yes, very much so. There is much in this document that is both very welcome and long overdue: transparency, the longer term rolling perspective, the emphasis on capital formation after decades of neglect of infrastructure in this country with results that are there for all to see. I think all that is very desirable.

  238.  And show you the benefit of your giving your opinion on matters of MPC decisions.
  (Professor Buiter)  This was decided long before I wrote that particular piece. The notion of a comprehensive public sector balance sheet is something that I have been advocating since the late 1970s, early 1980s in fact. This is one step on the road towards that. We cannot just look at narrowly defined financial assets and liabilities, we have to look at the whole balance sheet of the public sector comprehensively defined.

Mr Kidney:  I agree, thank you very much.

  239.  Just one last question. You stated in your questionnaire, question seven: "Other things being equal, an earlier release of the minutes is clearly better than a later one." We know you are going to have a big discussion about this. What do you believe are the benefits of an earlier release of the minutes?
  (Professor Buiter)  The benefits of an earlier release are clearly that I might be sitting here explaining my most recent vote rather than not being able to. Six weeks is a long time for the markets to wait for the explanation of our decisions. It reduces uncertainty if we know what the considerations are that go into the discussions. In that sense earlier information almost always, if the quality of the information is the same, is better than later information.

  240.  That is the argument against, on the quality side?
  (Professor Buiter)  Yes. You do not want anything rushed. It is actually quite a job to produce the minutes, it is not a tape recorder and delete every other word, it is hard. I would not want to advocate anything that would harm the quality of the minutes which I think has improved since our rather bland beginnings.

  241.  Do you think there will be any impact on economic data of a major event like the World Cup?
  (Professor Buiter)  It depends on who wins! If Britain wins then surely shares in breweries will be very good value.

  242.  Britain is not playing.
  (Professor Buiter)  Sorry, England.

  243.  I think you may have a Scottish supporter there on the left.
  (Professor Buiter)  I have the opposite problem when people talk about Holland.

Chairman:  Thank you very much, Professor Buiter.