"The European Central Bank: Independent and Accountable"?
by Julien MATHONNIERE
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n the present schedule, the European Central Bank (ECB) is due to come into existence in the second half of this year. The treaty of Maastricht narrowly defines the ECB's primary objective as maintaining price stability. Now, it is commonly believed that such an objective will be best achieved where the central bank is granted independence in terms of monetary policy. But at the other end stand the national fiscal policies of the states that may diverge from one another in terms of priorities, and hamper the central bank's actions. If independence has therefore to be retained, accountability should be regarded as a means to counterbalance the mutual adverse effects of monetary and fiscal policies. “Accountability might be to the ECB what the Glasnost had been to the Soviet regime fifteen years ago: a rule of transparency by which it is redeemable of accounts to the general public.” This is were accountability might be to the ECB what the Glasnost had been to the Soviet regime fifteen years ago: a rule of transparency by which it is redeemable of accounts to the general public. But a line has yet to be drawn to prevent any interference between independence and accountability, and exploit the now acknowledged benefits of the latter. If too much accountability may be counterproductive, a certain measure of it is always desirable though. As a matter of fact, although price stability should be the prime responsibility of the ECB, it does not mean, however, that monetary policy is the only instrument in play. States can still exercise fiscal policies that may conflict with each other over their economic priorities and the objectives they seek to achieve. And this is precisely where fiscal policy will substantially weaken, and may eventually overpower the Central Bank's actions. This problem is compounded by the unavoidable clashes between an independent conservative bank (mainly concerned with the fight for low inflation), and more or less fiscally liberal governments that may prefer to avoid strong variations in output or unemployment. Although there seems to be incentives for neutralising the influence of fiscal policy makers through a balanced
budget amendment or some kind of stability pact, it does not appear to be a sensible solution. Withdrawing the possibility to exercise a fiscal policy may leave the states uncovered against endogenous shocks and without effective inflation control. It is therefore not a good idea to get rid of one policy to preserve the other. As demonstrated by the case of the Bundesbank, independence allows for non‐ inflationary policies to be fully credible, effective and implementable, not least because the central bank is exonerated from political interference and the concern for other objectives such as employment, output...etc. Naturally, the ECB will have to establish a reputation similar to that of the Bundesbank's, which might prove to be a difficult challenge in the short run as it will have to match the public's preferences. Now here lies a delicate issue: inflation is anything but an attractive option, resulting in a net welfare loss. The fight for low inflation is justified provided the short lived costs of disinflation are measured against the long term benefits of price stability. Unfortunately, nothing proves that the concerns of the public opinion are to be understood in terms of long‐term welfare gains. Short‐term employment preoccupations might instead overwhelm the acceptance of a fight against inflation. Now, if inflation cannot be reduced at zero cost, then this is where accountability should come into play. If an additional instrument could be introduced to offset at least part of the adverse affects of disinflation, then it would result in a general "Pareto improvement". This instrument would have to help coordination between monetary and fiscal policies so that inflation would, at least not deteriorate, and at best decrease without output being destabilised or unemployment aggravated. And this is why accountability should be understood in terms of cooperation and coordination. Implementing a measure of accountability means that an effort will be made to reach an outcome within the policy process which tends towards what would be called a bargained solution in game theory. Independent targets may have to be sacrificed but in return, better performance may result from the removal of conflicts due to non‐cooperative behaviour. Accountability therefore appears as a means of reconciliation between monetary and fiscal policies which would otherwise annihilate one another. Lower inflation would not come at the expense of a worsened output any longer. In the meantime, we shall see it is a democratic process by which some kind of feedback is given to the public on what decisions have been or are to be taken, and why. Accountability seeks to grant the ECB the political legitimacy it may otherwise lack when, at certain times, its monetary policy will go against the interests of individual countries.
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If granted too much independence without counterpart, the risk is patent that the ECB may be tempted to act in its own interests. Democratic control is therefore to prevent the occurrence of such a risk, and will lye on transparency principles. Suspending or circumscribing the ECB's independence may not prove as easy as it was for the national central banks. In Germany, for example, the Bundesbank's actions could be vetoed by a simple majority at the Parliament. But the supranational status of the ECB will grant it more protection, as any such action would involve a general agreement on a revision of the Maastricht treaty where its independence is enshrined. This problem is compounded by the still widely sclerosed economic policy debate throughout the European Union. Accountability seeks to grant the ECB the political legitimacy it may otherwise lack when, at certain times, its monetary policy will go against the interests of individual countries. The public opinion is the depository of democratic control over the bank's actions, and should be given the opportunity to exercise this control. The trouble is that accountability can also be taken too far, which would impede the central bank's independence. If imposing too strong a form of accountability (e.g. strict inflation targeting), the benefits to national governments might be made at the expense of the ECB. The attraction of allowing a fiscal coalition to take over the design of the bank's monetary policy (in order to achieve its own objectives) is great that may ultimately lead to monetary surrender. Therefore, a compromise has to be found on the optimal trade‐off between independence and accountability. We earlier understood accountability as a means of cooperation/coordination between monetary and fiscal policies to achieve a Pareto improvement, taking for granted the ECB's primary goal is to achieve low levels of inflation. Indeed, it is argued here that cooperation substitutes may include the imposition of an inflation target by the participating governments; target dependence through convergence in the priorities; and the cooperative and concerted choice of the bank's governor and the definition of the bank's priorities in advance. Bones of contention nonetheless remain, in particular as far the choice of the ECB's first governor is concerned. As we explained supra, to restrain fiscal policies would turn out to be counterproductive and dangerous. And that is where accountability is to be introduced: to overcome the mutual neutralisation of economic policy instruments and induce overall improvements. Unfortunately, if independence seems now unquestionable, the constitution of the ECB, however, gives a low priority to transparency and accountability. The ECB will not have to publish minutes of its meetings, and will only have to account to the European Parliament once a year. The ECB cannot afford to get away with transparency as the Bundesbank did. Now, it is essential that an appropriate constitutional framework is chosen, and transparency be placed at the forefront of the bank's decision‐making process. There is so much at stake that the nomination of an executive board should be seen -3-
in the light of such considerations, that is, the proclaimed and actually observed views on accountability of the potential candidates.•
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