Examination of witness (Questions 220
TUESDAY 16 JUNE 1998
Sir Teddy Taylor
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
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
Sir Teddy Taylor
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
227. That is fine. What about this Parliamentary
Group of the Party of European Socialists? Is that quite a respectable
(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
(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
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
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.
Sir Teddy Taylor
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
(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
(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
(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
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
Sir Teddy Taylor
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.