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It all depends on what you mean

by William Keegan, Chairman, Board of Contributing Editors

It all depends on what you mean

Some years ago I introduced a new colleague to Eddie George, then Governor of the Bank of England. My colleague sat fairly impassively during most of the interview; but when Eddie suddenly said: ‘Do you know what really turns me on?’, the colleague displayed rather more interest. However, when Eddie continued with the one word ‘stability’, there was a sense of anti-climax.

The great thing about Jean-Claude Trichet, president of the European Central Bank, is that he always seems to exude an air of calmness and stability. He is generally considered ‘a class act’, including by those British officials who have little time for the euro. Even when he is being controversial, and/or all around him there are serious problems, Trichet gives the impression of a man whose feathers cannot be ruffled. By contrast, Eddie George’s successor at the Bank of England is a more excitable figure, who increasingly courts controversy. Mervyn King, too, is a great believer in stability, and has many times observed that in an ideal world monetary policy would be ‘boring’. Incidentally, anyone who has sat through the long press conferences with which King accompanies the publication of the Bank of England’s quarterly inflation report knows that the Governor consistently puts in a virtuoso performance – a class act indeed.

Thus Trichet and King are united in their belief in stability, and have both been champions of the recently fashionable practice of making the inflation target (almost) the be-all and end-all of monetary policy. Unfortunately they, and the international economic and financial establishment, became so obsessed with the apparent success of inflation-targeting that they took their eyes off the ball marked ‘financial stability’, and we ended up with the crisis that began in August 2007.

Now, many years ago the BBC used to have a popular programme called the Brains Trust, in which a certain professor of philosophy, when asked a question would say: ‘It all depends what you mean by (x) or (y)’. It all depends on what you mean by ‘stability’. Mervyn King’s pursuit of stability sits happily with his well-known distaste for the euro and his view that the huge devaluation of the pound has been a welcome necessity. By contrast, for Trichet, exchange rates should be ‘stable’ and movements can be ‘brutal’ – although given heightened fears of imported commodity and oil price inflation, a euro strengthening is seen to assist the inflation battle, even if it has obvious implications for competitiveness.

One problem for these Governors and their respective committees was that they had the benefit of low import prices for many years, and in the UK’s case the counter-inflation relief of a pound that was seriously overvalued until 2008. This overvaluation destabilised the economy, inflating those ‘imbalances’ – but temporarily stabilised the inflation rate. In the debate about what to do in the face of external inflationary pressures and a recovery that, outside Germany, has been far from assured, there are echoes of the differing responses to the 1973-74 oil crisis. Then Germany chose to fight imported inflation, the UK to ride it, and it was the UK that fell into the hands of the International Monetary Fund.

In the euro area it seems that, although Axel Weber is resigning from the Bundesbank over his objections to the way the crisis is being handled, there is, as in Germany in the 1970s, less inclination to tolerate above-target inflation caused by external factors than has been manifested by Mervyn King. By contrast, much has been made of Trichet’s recent statement that the ECB is now exercising ‘strong vigilance’.

Yet outside Germany the situation is perilous, and unemployment very high. Is too much being read into these putatively subtle changes of phraseology? I am reminded of the time an ECB member told me that when dropping the world ‘vigilant’ in favour of ‘alert’ they were trying to hint that policy was softening. Yet to this correspondent, and to my informant, ‘alert’ sounds tougher than ‘vigilant’. It all depends what you mean...