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The legal basis of the European Central Bank guarantees its institutional independence in conducting monetary policy, while it also extends the separation of powers to all other central banks comprising the European System of Central Banks (ESCB). In particular, Article 130 of the Treaty on the Functioning of the European Union states thus:
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.
It is the humble opinion of the present author that institutional independence, stemming from the separation of state functions, as theorised by Montesquieu, is both a central feature and a precondition of a democratic polity, as it guarantees the rule of law and prevents, to the extent that this is legally possible, the abuse of power by the authorities. Nevertheless, the other principle of democratic administration, which is as vital as that of institutional independence, is democratic legitimacy that is subdivided into input and output legitimacy, the latter also known as democratic accountability. For the state to be genuinely democratic, these two constitutional values must be infused in the legal corpus that underpins, permeates and penetrates the polity.
Heretofore the European Central Bank, an indubitably independent institution, does not stand up to the constitutional requirement of democratic legitimacy, which in this case, can only be made manifest in the form of democratic accountability, given the intrinsic technocratic design of central banking (as is also the case with the judiciary for instance). While the ECB does publish a full array of information pertaining to its activities and decisions, there is nonetheless, no parliamentary scrutiny over some of its most important decisions. To draw from a very pertinent issue, I may direct the reader to contemplate on the implicit responsibility of the ECB in the Emergency Liquidity Assistance (ELA) that was provided to the banks of south Cyprus, in particular Popular/Laiki bank.
Under present conditions, prudential supervision remains a national competence, in spite of whatever coordination may exist at the supranational level; and regardless of the fact that the legislative process for the formation and implementation of the Single Supervisory Mechanism, is at an advanced stage. Nonetheless, the ECB is the only entity in the EU/Eurozone that has the right to authorize the initiation of any liquidity injection, including, but not limited to, the ELA, which is in effect, a tool the ECB possesses to provide liquidity even to those banks whose collateral is of a lower quality than the ECB’s requirement, but whose underlying condition is that of solvency combined with illiquidity.
In this respect, the case of the ELA in Cyprus, whereby the ECB authorized the Central Bank of Cyprus to use this concoction to support Laiki bank, with a total of €9 billion (total output of Cyprus is approximately €18 billion), despite the fact that that particular bank was evidently insolvent, raises profound questions on both the responsibility of the ECB and the capacity of national regulators to remain neutral to the temptations of domestic cronyism and national politics, in the absence of a genuine banking union.
While it is crystal clear that the brunt of the barbs should be borne by the Central Bank of Cyprus, for failing to exercise its prudential function in a manner that would benefit the general good, there certainly is a case to be made against the ECB, which has hitherto purported to be a pillar of credibility, but which can no longer be perceived as such, given that it was the institution that allowed for the ELA to be used, no matter how frivolously, to the extent of opening huge black holes in the domestic banking system.
Understandably all of us European citizens cannot issue any ex cathedra injunction against the ECB, and rightly so; but in line with the constitutional principles of a democratic polity, we do have the right, or rather the obligation, to demand thoroughgoing and effective parliamentary scrutiny over all of the activities of the ECB and of all other institutions, bodies and agencies within the EU (such as Europol). It is lamentable to currently find ourselves laboring in the penumbra of institutional uncertainty as to where ultimate responsibility rests; and, a fortiriori, it is objectionable that we cannot have our own institutions complying with the democratic values we uphold.
Whatever the specifics of the ELA in Cyprus may be, the gist is that without democratic accountability, the ESCB, the Eurosystem and the ECB will never stand up to the rigorous requirements of a democratic community. Thus, apart from knowing the truth on this very case, I am of the view that we ought to also stress the need for a revision of the legal basis of the ECB, so as to make it democratically accountable to the citizens of the Union.
Picture credit: Wikipedia