The European Central Bank (ECB) is the institution of the European Union tasked with conducting monetary policy. To deliver on its mandate, the ECB enjoys a very high degree of independence. Though institutional independence is a core attribute of the division of powers, the ECB’s position has to be considered in conjunction with the Europe Union’s peculiar political order.
The rationale underpinning monetary independence is that politicians should not be in a position to influence monetary affairs, for that could provide the incentive to introduce short term measures for boosting economic activity at the expense of longer term sustainability. The central bank, just like a constitutional court, has to think about the broader context and the wider ramifications of its policy, something that politicians may not necessarily be keen on doing if they are to win an election.
While monetary policy ought to be protected from opportunistic interference and must have a degree of continuity, the general perception of politicians as abusive and the concomitant aversion to the possible fluctuations of democratic conduct, if universalised, will usher in a robust technocracy. To avoid such extremes, it is of paramount importance to distinguish between operational independence and independence from democratic control. The former is a prerequisite to good governance as well as the optimal, unencumbered conduct of monetary policy, while the latter is dubious at best.
Though the degree of independence as well as the scope of authority always need to be proportional to the task, one must also account for the modality of independence: the way in which independence is realised in a certain state of affairs. In the EU’s brand of supranational politics, it exhibits certain unique characteristics:
- pseudo-permanence: no given parliament, neither the European nor any national one, can amend the ECB’s mandate; unanimity among Member States is required to change a single iota in the Treaties;
- tokenistic accountability: given that the European Parliament has no means of initiating the process of altering the ECB’s legal basis, the democratic accountability of the ECB is effectively reduced to a communication policy, with the so-called Monetary Dialogue between the two institutions being nothing more than “dialogue”;
- euro statelessness: the euro is a currency that belongs to no state, there is no political union underpinning the Economic and Monetary Union and, a fortiriori, the ECB has no counter-party European Treasury with which to coordinate economic policy.
Couched in those terms, we would contend that the modality of institutional independence actually makes the ECB mostly independent from democratic control rather than operationally independent; an unintended effect of gradualism, of the EU being an incomplete political organisation. This claim is based on a specific, albeit not idiosyncratic, understanding of accountability: the obligation of an unelected institution to render things concrete before the citizens’ representatives and remain subject to the consequences thereof. Since there exists no European Ministry of Finance to frame the ECB’s conduct and given that the European Parliament has no full power to act on the ECB’s briefings, communications, policies, the independence of this institution seems disproportionate to its power.
A justification for the ECB’s institutional standing can be that its clear mandate enables it to achieve “output legitimacy”. If it delivers on its expected objective of price stability it is legitimised by the result. While plausible, the claims on output legitimacy leave something to be desired, for they presume the ECB’s mandate to be unequivocal, i.e. that there is only one way of interpreting it and, hence, any one can be an objective judge. Alas, price stability concerns the medium term outlook of monetary policy. However, there is no clear definition of what the “medium term” amounts to. It is ambiguous: it can be 2-5 years or perhaps 5-8. Maybe some other range. Also, how close is “below but close” to 2% inflation? Does the projected rate also account for it?
Our task is not to provide definitions on the subject, but only to point to a certain weakness in the argument for output legitimacy. Such vagueness opens up a sluice gate for the introduction of all sorts of justifications to any policy. To that end, accountability to parliamentarians is reduced to a process of “explaining” decisions, so obscure language can always be employed to obfuscate or beautify the actual outcomes. The gist is that unelected officials have to make qualitative decisions and, therefore, another institution should be able to hold them accountable.
Its mandate’s vagueness notwithstanding, even if the ECB were to consistently deliver on price stability, that would not be sufficient to legitimise all of its initiatives, for it clearly acts on issues that do not pertain to inflation targeting even if they may be treated as ancillary to that end, such as the decision not to maintain an accommodative stance vis-à-vis the Greek banking system during the month of July 2015. There it had to make a judgement call on two seemingly conflicting objectives: (1) maintain the uniformity of monetary policy, and (2) abstain from furnishing liquidity to financial institutions that were expected to become insolvent. While the trade-off may be understandable, the fact remains that a certain judgement on politics cannot be evaluated solely by means of referencing a single macroeconomic indicator.
There is a certain view that a central bank’s institutional independence should mimic that of a supreme court. Given that both entities are made up of unelected experts in their fields, this appears to be a sound proposition. Yet such thinking seems to underestimate the qualitative differences between a court of law arbitrating on the scope of legislation, whose decisions tend to have a gradual and progressive impact on the social fabric, and a central bank with the power to make an entire economy go boom or bust with relatively little effort (especially the latter).
It is in the nature of central banking to be the cornerstone of a financialised system. In the modern world, financialisation and central banking are inextricably bound up together. A failure to maintain the money supply will grind a developed economy to the ground, just as a prolonged period of disinflation or outright deflation will severely damage economic activity while making nominal debt burdens heavier. In other words, a central bank is powerful, especially if it rules over a significantly large economy.
As concerns the reach of monetary policy, one may take Quantitative Easing as a case in point: a policy instrument with which the central bank shapes interest rates throughout the yield curve by virtue of buying assets in the secondary market. This effectively represents the capacity to redistribute resources across the economy. If the central bank can achieve the same or similar results as those of an elected government’s fiscal and social policy, then it follows that it must also be subject to strict democratic control: citizens have to ultimately be able to review, reject or approve of effective wealth transfers.
A central bank needs to be closely monitored, be subject to thorough scrutiny, and be held fully accountable for its decisions precisely because its day-to-day operations can change the material conditions of entire classes of economic actors. That is more so for the European Central Bank which finds itself in an institutional framework that remains under construction. With few credible mechanisms for placing a check on the monetary function, policy makers should not remain satisfied with narratives on the sufficiency of output legitimacy or with misleading comparisons between a central bank and a court of law. Better institutional arrangements and accountability structures are needed, such as:
- concerted action: just as with the Bank of England, make the rate of inflation an annual target placed in the hands of the European Finance Minister, who will also control the European Treasury and, hence, be responsible for formulating the economic policy of the supranational level;
- dual mandate: like the Federal Reserve Bank of the United States, the ECB has to pursue price stability and full employment, with no priority given to any one of them—it is preposterous to witness record levels of unemployment and the central bank do nothing about it (besides, an increase in jobs and, thus, in consumer spending would move the euro area away from disinflationary or deflationary territory);
- full transparency: ensure that records of all General and Executive Council meetings are kept, and that they are available to Members of the European Parliament within the context of the Monetary Dialogue, following a formal request from the Economic and Monetary Affairs committee;
- legislative control: provide the co-legislative institutions of the European Parliament and the Council of the EU with the right to jointly propose an amendment to the legal basis of the ECB, subject to approval by the European Administration, or vice versa.