ECB Governance in an Enlarged Eurozone

We study the rotation rule decided by the European Council for the functioning of the ECB Governing Council after EMU enlargement. Desired interest rates by each member of the Governing Council are calculated on the basis of Fisher, truncated Taylor and Taylor rules successively, and on the basis of a convergence of both GDP per capita and price levels within the EU in 30 years. Then, various decision rules are simulated. We show that moving from the “old” rule (where each member of the Governing Council has a vote at each meeting) to the “new ” one (where, at a given meeting, only 15 national governors have a vote) does not have much impact on the decisions made by the Governing Council in an enlarged Eurozone. However, should rotations be relatively infrequent, the system could end up close to a constituency system. In this case, core Euro12 countries could be better off in a Euro25 than in the Euro12, because they would be in the position of imposing lower interest rates. But core Euro12 would be worse off in a Euro22 (EU25 less Denmark, Sweden and the UK) compared to a Euro12 because high inflation countries would be able to impose higher interest rates. The results obtained with fast rotations are less dependent on the perimeter of the Eurozone, and closer to the Executive Board’s desired rate, than those obtained with a constituency system