Over the last year or so, I have written at length about the independence and accountability of the European Central Bank. In the present article I consolidate my criticism of the status quo and further expand on it. The analysis centres on the particularities of the ECB’s institutional position and tackles the various arguments in support of it. Each point is addressed in its own section. The contents are outlined as follows:
- definition of independence;
- medium term outlook and election cycles;
- narrow mandate and accountability;
- statelessness and heterogeneity of the euro area.
1. Definition of independence
The European Central Bank is the institution of the European Union tasked with performing the monetary function. The ECB is part of the Union-wide European System of Central Banks, while it coordinates the operations of the Eurosystem, which consists of the central banks of countries whose currency is the euro. The presence of these systems is important to note, as the provisions of the Treaties on independence cover them as well, thus removing the relevant power over national institutions from national will-formation.
1.1 Legal foundation of independence
Article 130 of the Treaty on the Functioning of the European Union provides the legal basis.
When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks.
This is a particularly strong version of independence:
- Inter-institutional. The ECB and the National Central Banks shall not take instruction from other EU institutions or national authorities.
- Non allegience. Decision makers of the central banks are prohibited from doing the same, even when that concerns their own country/government.
- Double enforcement. Not only are the central banks protected from external interference, but all other public stakeholders are further tasked with preserving this state of affairs.
- Quasi permanence. The law in question is an international treaty, which means that it cannot be changed through the ordinary legislative procedures, neither at the European level nor the national one. EU Treaty amendments require consensus from all the Member States and, more generally, the process is particularly cumbersome as it unfolds against the backdrop of inter-state power politics and crossing veto rights.
1.2 Four aspects of independence
In conceptual terms, independence is four-fold: (i) institutional, (ii) instrumental or operational, (iii) financial, and (iv) personal.
The first concerns the separation of powers in a rule-of-law-based democracy (a republican order, in the sense of “Republic”—not to be confused with the right wing party of the USA). This principle stipulates that the cardinal functions of statehood—executive, legislative, judiciary, monetary, military—should be performed by different institutions in order to diffuse power and prevent the rise of autocracy or practices of that sort. The principle is further reinforced by concomitant constitutional norms such as limited government, or in the case of the European Union the consubstantial principles of conferral, subsidiarity, and proportionality. Competences conferred to EU entities should be defined explicitly, their scope should be commensurate with the content of the policies involved so that it does not interfere with the vertical separation of powers (between local, regional, national, and supranational levels), and any actions taken therefrom should be proportional to the ends sought while never creating material conditions for upsetting this state of affairs.
We will return to this notion when considering the ECB’s recourse to ‘unconventional’ monetary instruments and how these impact matters beyond the confines of monetary policy.
The second aspect of independence, instrumental or operational, concerns the tools that the institution may use in pursuit of its mandate. Such discretion should be interpreted narrowly, for any action must remain consistent with the general norms of the polity (operational independence does not allow for arbitrary measures that would be of dubious legality in the republican order at-large).
Financial independence consists in the budgetary sufficiency of the institution in the pursuit of its tasks. Without enough resources, the institution’s overall independence could be compromised by emerging dependency needs and/or its capacity to fulfil its mandate would be severely constrained by material limitations.
As for personal independence, the fourth aspect here considered, it protects individuals working for the institution from external influence, including from any possible conflicting interests. If decision makers could be guided into certain courses of action then the independence of the institution itself would practically be undermined.
2. Medium term outlook and election cycles
The ECB pursues its mandate of price stability with a medium term outlook. The rationale is both economic and political. The former consists in the mechanics of macroeconomics. Fluctuations in the price level are gradual. Triggers tend to have an incremental, trickle-down effect. This is particularly true for monetary policy whose effects are typically felt in the real economy long after a certain set of measures is introduced, due to delays in the ‘transmission mechanism’. Monetary policy passes through intermediaries, private banks which have their own incentives and priorities, which practically places a [time] barrier between public policy and the real economy. The central bank’s efforts to offer a direction to the financial sector receives responses that are distributed over a several-month-long temporal horizon. It would thus be inappropriate to expect policy deliverables over the very short term.
As for the political reasoning of the medium term outlook of monetary policy, it is construed as one of technocratic adequacy. Politicians face election cycles which skew their incentives, or so the thinking goes, in favour of short term measures, even when these are tokenistic in nature and contrary to the longer term interests of society. Elections as such are therefore treated as an effective hindrance to optimal policy making and implementation, for they force expedience and self-interest over the general good. Such a view is peddled as a more or less evident fact of political life, a necessary evil of democracy that should, nonetheless, be confined to politicians. Technocrats, however, should be insulated from public scrutiny in order to focus on their task and, as the thinking goes, deliver optimal results.
While there is truth in the economic underpinnings of medium-termism, at least for as long as central banks are not eager to embrace alternatives that cut the intermediary (e.g. “helicopter money”), the political reasoning is outright spurious.1 It rests on a tangle of fallacies and misunderstandings.
It first introduces an a priori disadvantage for all politicians, namely a structural or else intrinsic weakness in the job itself, which hampers efforts to do good policy-making while striving to remain in office. The politician is depicted as a charlatan and an opportunist with no intention whatsoever of doing the right thing. If they do, they get punished for not prioritising their own short-term agenda.
While there may be instances of politicians that conform to such a caricature, the phenomenon cannot be generalised. Not only is it erroneous to think of charlatanry as germane to public life, it is also presumptuous to claim that the electorate are but a bunch of gullible fools willing to reward only the connivers and those with dubious intentions, rather than members of society who exhibit integrity and professionalism while in office. The fact of the matter is that electorates do care about the longer term implications of policy and do recognise the merits of governments that deliver tangible results over a number of years. For example, the French are rightfully not rewarding Mr. Hollande and his party because of their spectacular policy failures and inability to deliver on their promises (such as the 70% tax on the super-rich or the supposed repeal of the Fiscal Compact). In contrast, the Germans did support Ms. Merkel’s handling of the euro crisis and might still renew their commitment to her brand of government (whether this is right or not is a matter of opinion—the point is that citizens are not idiots).
The tacit elitism of such misconceptions of democracy, fails to account for the actuality of policy-making and the content thereof. At the surface level, most areas of policy do in fact have a medium to longer term horizon. Think of everything pertaining to the justice system, with such matters of principle as the protection of fundamental rights. These do not change arbitrarily every four or five years. The same can be claimed for police cooperation and the application of criminal law, the formulation and conduct of foreign policy, education, and economic policy. Europe’s economic governance, as well as the framework for bank supervision, was refashioned between 2010-2014. The expectation is that no substantial change will occur to it at least until 2025. Even then, reforms will not seek to start from scratch but instead iterate on what already is in place. States, institutional orders, do have a certain continuity. It is preposterous to depict them as erratic magnitudes that are subject to radical change at regular intervals.
In addition, the peculiarities of the EU should be mentioned to further dismiss the political narrative of technocratic medium-termism. EU policy can only change once widespread consensus is reached (whether this is desirable or not is another discussion altogether). Here is an overview:
- the European Council must agree on a policy agenda for the coming years;
- the Commission must then prepare new draft legislation, which either repeals, amends, complements, or supersedes existing laws;
- the European Parliament and the Council of the EU, must separately follow their own procedures for amending each Commission proposal, and then agree on a common text;
- the end product becomes law of the Union and is implemented by the Member States.
If it is not already evident, European policy goes through a minefield of potential blocks and challenges. While this multifaceted complexity may render the process relatively slow and seemingly cumbersome, it does nevertheless ensure that decisions are as broad-based as possible under the circumstances. What this means is that the supposed short-termist drive of politicians is but a chimera, a fiction for providing justification—the veneer of authority—to an otherwise weak case.
All policy has a medium term horizon, not just monetary matters. Consequently, the ECB should not be thought of as being in an exceptional position where it requires bespoke solutions to tackle the challenges it faces. The rules of conduct that hold true for all decision makers should extend to the ECB as well.
3. Narrow mandate and accountability
The ECB (the European System of Central Banks) has a seemingly straightforward objective. To ensure price stability. On the face of it, the mandate is explicit and limited in scope, which, if indeed so, provides a clear benchmark against which the ECB’s conduct can be evaluated. Accountability is thus a function of compliance with the mandate. This is also known as “output legitimacy”, which practically means that an institution is given a specific job and no one can question its conduct for as long as it delivers what is expected.
The argument is plausible but only at a theoretical level where the mandate is indeed narrow, explicit, and does not leave room for diverging interpretations. In the ECB’s case, the opposite is true.
- Obscure mandate. The Treaties envisage a generic commitment to macroeconomic phenomena that are not defined in any concrete terms: what exactly is “price stability” in quantitative terms, what methodology is to be employed or else what is the temporal horizon of evaluating it? Even worse, the entity entrusted with answering such questions is the one expected to be held accountable against them: the ECB.
- Conflict of roles. The ECB has provided substance to the aforementioned Treaty provision. It comes in the form of an equally problematic definition, which is an inflation rate that is below, but close, to 2% over the medium term. No objective means exist for knowing exactly how close to 2% the rate should be and, more importantly, there is no specific range of years that qualifies as “medium term”. It could be anything from a bit more than 18 months to 7+ years.2 To further complicate things, the entity that is once again responsible for providing direction and clarity on the matter is the ECB.
The mandate is inadequate and the ECB has excessive power over its definition, which gives it open space for deflecting any serious effort at scrutinising its conduct. All the ECB has to do is find clever rhetorical tricks of explaining how its actions are aligned with the purposefully imprecise definition of price stability it has adopted.
This state of affairs, apart from being a glaring flaw of the Treaties (certainly worse than that spurious “no bailout clause”), is in direct contradiction to the principles of a modern republic, in particular the separation of powers. The criteria of an institution’s accountability are established externally to it. The Commission is held accountable by the European Parliament. The Council, even though it is not a second parliamentary chamber, is severally answerable to each national electorate. Such accountability also applies to the European Council. The European Court of Justice is accountable by virtue of its relationship with national supreme courts as well as its overall alignment with the specifics of the European integration process. Whereas the ECB is practically accountable to itself and only indirectly and ‘communicatively’ to the Parliament and European citizens in general.
Yet the problem is not merely constitutional. It also concerns the substance of policy. In contrast to other specialised institutions, such as courts of law, the central bank can potentially influence, if not determine, areas of policy well beyond its nominal powers, and in manner that is rather immediate and direct.
Consider the ECB’s quantitative easing. This is an initiative taken under the pretext of price stability, whereby the ECB pumps oodles of euro into the financial system in exchange for assets. In effect, the central bank is subsidising segments of the private sector, large corporations, which is a form of fiscal and social policy in that it redistributes resources while picking winners and losers. Unlike any government, the ECB does not have to go through a lengthy legislative process, it does not need to meet and heed the concerns of civic society, nor does it have to gain the approval of wide parts of the population. It proceeds with its business under the cover of an obscure mandate that no democratic force can pin down, and defends its actions by embellishing them with meaningless language and unnecessary jargon.
The institutional independence of the ECB is excessive, disproportionate to its role in the EU legal order, and far from the standard that applies to other EU institutions. Independence in the sense of “checks and balances” is indeed valuable and desirable, provided there are checks and balances which are sufficient and effective. This is not the case. Moreover, the ease with which the ECB can transition from ‘conventional’ to ‘unconventional’ measures, and the ramifications the latter have on normative issues of a fiscal, economic, and social sort, should actually call for an ever more strict accountability framework. The mandate should be rendered explicit in the Treaties. The method should be subject to review by the co-legislative institutions. Fears of short-termist opportunism are exaggerations and misunderstandings of how democracy works in general, while they completely disregard the peculiarities of EU politics, in particular with regard to the need for widespread consensus.
4. Statelessness and heterogeneity of the euro area
There is this view that the independence of the ECB is further justified by the idiosyncracies of European integration. The euro area is not a nation state. It is a group of nations that share a common currency and which have opted to closely coordinate a number of their policies. Against this backdrop, the argument goes, the ECB needs to enjoy full independence in order to provide a clear benchmark and a direction amid the heterogeneous and potentially heteroclite whole of the currency area. National leaders can thus trust in the ECB to provide for a stable indicator at the supranational level.
As with previous arguments in favour of the status quo, this view cannot withstand scrutiny. At first, it treats the currency area as an amalgamation of seemingly incompatible nation states, whose sole strong connection is the shared currency. That is flatly incorrect. The euro is but an extra layer to a much wider process of European integration. The national economies that have ended up comprising the euro area already had harmonised a wide range of their policies and had established a single market among them. And that had been achieved courtesy of deliberate concerted action at the supranational level.
The EU has decision-making mechanisms that provide for the coordination of political action and, hence, ensure its homogeneity. That Europe or the euro area is not a nation state, does not mean that it is not isomorphic to a state in a number of important areas. There are processes for governance, there is a legislative procedure, there are elections, there exists an independent judiciary, etc. Whatever flaws the main EU edifice has are of degree not category. They could have been better even if the underlying constitutional norms remained constant.
What is indeed heterogeneous in Europe are the historical path dependencies of each nation. These however have little to do with the role of the European Central Bank or monetary policy in general. They just reflect the cultural milieu in which the integration process unfolds. No wonder the EU’s motto is “united in diversity”. Differences of history are to be overcome or otherwise synthesised by means of the European integration process, as all Member States move in the same direction and stand on a common normative foundation. That is the material implication of policy harmonisation at the supranational level.
As for the statelessness of the euro, the fact that the single currency is not backed by a single sovereign, here too the issue is not peculiar to either the ECB or monetary policy. It touches on matters of legitimacy and accountability of the architecture as whole, where indeed we witness a tension between the supranational uniformity of decisions (they apply to the system as a whole) that is not checked against a commensurate demos. To render this phenomenon concrete (I call it “sovereignty mismatch”) consider the accountability of the European Council which decides for the EU as a whole, but its individual members, the heads of state or government, are only accountable to their respective electorates. The European Council cannot be held accountable as such, as a body. At any rate, the point is that the peculiarities of EU politics or the composition of the euro area, do not merit bespoke institutional arrangements that practically insulate the ECB from democratic will-formation.
Independence should be limited to the separation of powers
The ECB finds itself in a particularly favourable position. It practically faces no popular resistance to its policies. It circumvents such issues altogether. No supranational or national authority has sufficient means of scrutinising the EU’s monetary policy. Meanwhile, the Treaties fail to offer a robust legal framework that provides clarity and confidence in the monetary authority’s discretionary margins. In contrast, the ECB has the luxury to adapt the generic Treaty provisions on price stability to its specific needs and, furthermore, to interpret them in ways that suit its case. Given such power, the only way the ECB could be found at a fault and called into question, would be for its communication department to spectacularly undo itself (will not happen).
What derives from the analysis of the main themes of ECB independence is that an otherwise sound premise, the separation of powers in a democracy, is misused, poorly implemented, inwardly corrupted, and consequently rendered undesirable in the context of the Eurosystem’s monetary policy. The independence of the ECB is excessive and misaligned with the standard enjoyed by the rest of the Union’s institutions. It positions the euro as an instrument of elitism and even corporatism, especially in light of the ease with which the ECB effectively subsidises the upper echelons of the private sector.
The technical nature of monetary policy, the fact that it requires a medium term horizon to yield results, is no compelling reason to deviate from the constitutional standards applied to other institutions. Most, if not all, areas of policy have a longer term orientation. The view that politicians are mere opportunists that move with the ebb and flow of election cycles, is dangerously misinformed while veering on technocratic supremacism. Policy tends to exhibit continuity over election cycles, as differences of opinion at the rhetorical level are ironed out through the legislative process due to the need of finding room for compromise. This is even more so at the European level, where any kind of reform requires widespread consensus at both national and supranational levels.
As for the specifics of the European Union, in particular the fact that it is not a nation state, these have no implication on the role of the ECB and the functioning of monetary policy. There is no excuse for the present state of affairs. It is, at first, a lack of foresight from the drafters of the European Treaties and, secondly, the end result of a concatenation of misunderstandings by those defending the status quo.
The topic of ECB independence, apart from its obvious constitutional dimension, touches on immediate issues of economic and social policy. It also brings into question the overall functioning of the European Union and the effectiveness of its democratic norms. Monetary policy must indeed be supported with the necessary means and resources for meeting its clearly defined objective, within a clearly delineated mandate. Nonetheless, this cannot come at the expense of democracy and the concomitant need for the legitimation of policies with redistributive effects.
The ECB’s excessively favourable institutional position, apart from being unjust, offers a broad surface of attack against the EU by those with no intention of improving the integration process. It would be a lamentable error to assume that matters of monetary policy are the domain of the specialist and that citizens and their representatives have no say on the matter. What the ECB represents, what it does and fails to, has a harmful impact on the image of the European project as a whole.