ECB reshuffle and the outlook of monetary policy

The Executive Board must be representative of the euro area

The process has already started for the replacement of the current members of the European Central Bank’s Executive Board. There seems to be a lot of inter-governmental bargaining behind the scenes, though nothing specific for legislators to examine. The standard procedure for appointing the new Executive Board is opaque and deprives the European Parliament from adequately scrutinising the nominees.

In a January 23, 2018 article for the civil society platform QE for People, Stanislas Jourdan argues forcefully that the the election of ECB board members is in urgent need of reform:

The nomination process of ECB board members is a clear example of how the ECB is less democratic than other central banks.

The current process is one of closed doors negotiations with little to no transparency and no legitimacy from the European Parliament whose role is only advisorial.

We agree that Parliament should have more power in the decision-making process. Instead of just giving their opinion on the one candidate pre-ordained by the European Council, the Parliament should hold a hearing with a shortlist of candidates proposed by the Council. At this stage it would vote in favour of its preferred candidate.

Accountability should be commensurate with actual powers

The only reason for the lack of transparency is political custom. This is how things used to work. In the early days of the euro, such methods could be justified. The Economic and Monetary Union was delivering growth, while channeling capital flows from the ‘core’ to the ‘periphery’. These contributed to the epiphenomenon of the much-touted convergence of the economies (and the economic structures) of the euro area members. In short, everything seemed to just work. The stakes were low. There was no impetus for tinkering with a seemingly successful regime (and this is, by the by, why the Eurogroup was a largely obscure, extremely boring platform in the pre-crisis years).

The euro crisis has forever changed the state of affairs. The guiding assumptions of the past have been refuted. Institutional and decision-making arrangements have been reformed. Even the ECB had to change its conduct or risk the breakup of the single currency.

When the prevailing conditions that justified prior actions are no more, there is no reason to cling on to some vaunted tradition. That is more so given the elevated role and enhanced powers of the ECB. It has been granted macro- and micro- prudential competences in the form of the Single Supervisory Mechanism and the Single Resolution Mechanism. And it has already broken the rigid mould of ‘ordinary’ monetary policy operations.

Mr. Draghi did not follow in the footsteps of his predecessor. Instead he launched the Long Term Refinancing Operations (and subsequent variants thereof) to inject oodles of liquidity into the system; he introduced the Outright Monetary Transactions in an effort to eliminate tail risks of euro exit (this is what followed his famous “whatever it takes [to save the euro]” speech); and he engaged in quantitative easing in an attempt to manipulate yield curves and ease the pressure on state finances.

While Mr. Draghi’s policies were arguably necessary to prevent a far greater calamity, the fact remains that the ECB has blurred the lines between monetary and fiscal affairs, all while pushing the boundaries of what “price stability” amounts to. Specifically, the ECB’s initiatives have the effect of redistributing wealth or, at the very least, of refashioning the risk profile of financial institutions or other beneficiaries (effectively supporting them in times of trouble, thus shielding them from losses).

Anything that has to do with the distribution of wealth in society is best sorted out in the domain of democratic politics, where broad-based decisions can be made and where widespread consensus may be achieved. Otherwise, we experience the phenomenon of taxation without representation, even if indirectly so.

Personalities are of paramount importance

Coming to the issue of the composition of the ECB’s Executive Board, it is readily apparent that who is there matters greatly for the outlook of monetary policy. The institution’s recent history tells us as much, with Mario Draghi being far more willing than Jean-Claude Trichet to implement extraordinary measures. Besides, it is worth remembering the resignation of German economist Jürgen Stark from the ECB’s Executive Board, over what appeared to be a major disagreement on the role of monetary policy in the crisis, with Mr. Stark being more hawkish than the rest of his colleagues.

The euro is the shared currency of a group of countries with quite diverse economic structures. As such, the people making up the ECB Executive Board should not be of the same school of thought, especially if that tends to favour a particular country over others. By extension, they should not all conform to the patriarchal paradigm. Diversity is a prerequisite to the plurality of views and to the synthesis of opinions towards the formulation of an agenda that caters to the needs of the many. Given how monetary policy is designed and implemented, where a core group of people wields considerable power, the idiosyncrasies and beliefs of the individuals involved can make all the difference between two mutually exclusive paths to action.

It is also for this very reason that the European Parliament should have a direct involvement in the process of appointing new members. MEPs can scrutinise the shortlisted nominees, as regards their expertise, their overall views on the institutional order and general economic objectives of the EU and the euro area, as well as their personality and profile. The representativeness of the Executive Board should become a criterion of the ECB’s overall legitimacy.

Perhaps this can also be the first step towards a holistic rethink of the accountability structure of the Union’s monetary authority, with a more detailed formulation of the generic concept of “price stability”, the reinforcement of the monetary dialogue with tools for democratic scrutiny, and the introduction of objective criteria for assessing the effectiveness of monetary policy as pertains to the inflation target over a given time frame.