Voting on monetary policy in the Council of the European Central Bank

This paper challenges the received view that, from the monetary policy standpoint, EMU is a sure loss since participating countries relinquish a useful stabilisation instrument with no credibility benefit if they are equally averse to inflation. The single European monetary policy is decided by majority voting within the Council of the European Central Bank—a collegiate body consisting of the members of the Executive Board and the governors of the participating countries who are assumed to entertain Union-wide and national stabilisation objectives, respectively. The incentive structure originating from repeated voting and conflicting national interests provides an effective commitment device that reduces the inflationary bias and can offset the welfare loss due to the poorer stabilisation performance of the single monetary policy. However, this common advantage may well be accompanied by a very unequal distribution across countries of the stabilisation benefits from the single monetary policy, despite the presence of the members of the Executive Board.