Commentary: Europe's Costly Surplus of Central Bankers

It's an institution that has operations all over Italy and around the world, employs 8,500 people, and is headed by an executive who earns $700,000 a year. A major European corporation? Hardly. We're talking about the Bank of Italy, whose officials used to deliberate over monetary policy, and who now, well, it's not clear what they do now, or why it takes so many of them to do it. Since it began in 1998, the European Central Bank has supplanted the main function of the central banks of the 12 countries that introduced euro notes and coins on Jan. 1. But those 12 banks persist, with thousands of well-paid workers still busying themselves with various aspects of financial housekeeping.

It's time for European governments to begin cutting the national central banks down to size. After all, they now play only bit parts in the usual drama at a central bank: raising or lowering interest rates. True, they continue to control the flow of money into the financial system on behalf of the ECB, collect monetary data, and, in some cases, supervise local banks. But this complex structure--known as the Eurosystem--is terribly costly and often inefficient. If the euro is ever to live up to expectations, the system needs a major overhaul.

All told, the Eurosystem employs 56,000 people. That's more than twice as many as the U.S. Federal Reserve, which serves a larger economy. And European central bankers don't come cheap. Bank of Italy Governor Antonio Fazio's big salary is only a drop in a $4.2 billion bucket--that's how much the Eurosystem's staff collected in salaries and benefits in 2001.

This gold-plated system might be worth it if a gold-medal performance was the result. But, in fact, the system obstructs fast decision-making and efficient financial operations at both the European and local level. At the top, the 12 central-bank governors are part of an unwieldy 18-member ECB governing council, which proved its ineffectiveness at the onset of the current downturn when it failed to cut interest rates with the alacrity of the seven-member U.S. Fed. That's partly because the big-country central bank presidents often disagree with their small-country counterparts: For much of last year, Ireland, a fast-growth country, wanted higher rates to curb inflation, while slow-growth Germany needed a rate cut. Since the smaller nations command a majority on the ECB council, the result has been a built-in tendency to keep rates higher than would benefit the euro zone as a whole. The disparity between big and small countries will get worse if half a dozen new Central European and Mediterranean countries join the EU and the European Monetary Union over the next 5 to 10 years, as expected.

At the local level, the Eurosystem leaves too much power in the hands of the national central banks and doesn't do enough to encourage the creation of cross-border commercial banks. Shifting more regulation to the center would make it harder for the central banks to carry out one of their favorite functions--preventing local banks from being acquired by other European institutions.

The executives of the national central banks claim they still need large operations because, in Europe, regulating the banks and participating in the money markets are still very much local affairs. Maybe. But the euro zone's different financial systems are quickly being knit together, and the arrival of euro notes and coins will accelerate the process. Many financial firms own subsidiaries in other European countries, and it's only a matter of time before Europewide banks are created. Such superbanks will need to be overseen by the ECB, rather than by national central banks.

The best way forward would be for the Eurosystem to develop into a version of the Fed, with most power wielded at the center and national banks playing a much-reduced role. That would require the unanimous backing of EU states, an onerous requirement, indeed. But Europe has too many central bankers, and it's time to end the glut.

By David Fairlamb

With Susanna Scherer in Frankfurt

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