Wake-up call for the ECB

President Sarkozy’s repeated criticism of the ECB may reveal a misunderstanding of the benefits of central bank independence or a lack of democratic accountability. Much as it would be reassuring to conclude that Sarkozy and other sceptics are simply mistaken, it would be dangerous to dismiss the view that there is a serious issue that needs to be addressed before too long.

From the very beginning, the common currency has been described as suffering from a democratic deficit. Most of us just paid lip service to this observation. We quietly hoped that, seeing the merits of a single currency and appreciating the advantages of low inflation, most citizens would come to quietly trust the ECB. Public opinion polls, unfortunately, tell a different story. Eurobarometer reports that the proportion of citizens who consider the adoption of the euro as advantageous has dwindled between 2002 and 2006 from 59% to 48%. Even though inflation has never been so low in every Euro-area member country, 93% of citizens think that the euro adoption has “added to the increase of prices”. Obviously, something has gone wrong.

What is the problem? There are many potential explanations and, unfortunately, they are not mutually exclusive. Each one deserves careful scrutiny. A first issue is the formal democratic accountability mechanism. The ECB is constitutionally due to report to the European Parliament at least once a year. Perhaps sensing the democratic deficit, the President of the ECB has offered to appear four times a year in front of the Parliament’s Committee for Economic and Monetary Affairs. The event’s name, the Monetary Dialogue, tells it all: it is a gentlemanly discussion. Nowhere is accountability mentioned and none of that happens. Sitting atop a podium that dominates the dozens of Committee members, the President reiterates his earlier public statements and then shows his skills at avoiding the few embarrassing questions put to him. It is no surprise that the media largely ignore this non-event. One could have hoped that, ten years after it was started, the format would have changed and that well-prepared MEPs would sit atop the President and grill him with precise questions. The message from Frankfurt is that any change in the format would be seen as highly inimical.

If the ECB does not wish to expose itself to the Parliament, it could find other means to submit itself to citizens’ scrutiny. Most major central banks have made gigantic efforts to become ever more transparent. Not the ECB. It simply claims that it is transparent. Every month, immediately after the policy-setting meeting of the Governing Council, the President and the Vice-President give a press conference. This, in the ECB’s view, is a guarantee of maximum transparency. But the President’s opening statement is carefully-worded and so highly-coded that only seasoned experts can decipher what he is really saying. In the ensuing questions and answers session, the press corps is more pugnacious than the Parliament members but they almost never manage to get the President to say more than he intended to and to acknowledge any doubts that he may – that he should – harbour.

The Governing Council adamantly refuses to publish its minutes, claiming that all has been told during the press conference. Really? For instance, were all Council members in full agreement? The official answer is affirmative. This is simply unbelievable. Monetary policy decisions are usually finely balanced; it is very rare that a single course of action is so obviously optimal that no one prefers an alternative. It is highly improbable that none of the Council’s nineteen members ever disagrees with the decision taken. It would be very interesting to know what debate took place, the various arguments that were put forward, the reasons why some of them were accepted and others discarded, the degree of agreement, etc.

Normally, these debates are summarized in the final vote, but we are told that decisions are made by consensus, without any vote. This is worrisome. Consensus either means that the minority peacefully gives in or, worse, that no one dares being a minority. A vote, on the other hand, accomplishes two main things: it leaves the fate of the decision open – which encourages in-depth debates – and it gives a visible content to dissent – which allows citizens to understand the issues at stake. With so little information on what goes on in the Council’s deliberations, no one can be reassured that all options have received due consideration. Under these conditions, scepticism about the way the ECB conducts its business is not a mark of ignorance, it is a healthy reaction to an opaque process.

Even the ECB were more transparent, its decisions are bound to be controversial, if not always, at least quite often. This implies that the ECB has an important advocacy responsibility to perform. It must win, and retain trust from the citizens and its elected leaders. Addressing a highly specialized press corps once a month and the European Parliament once a quarter is unlikely to register many hits with citizens in the vast Eurozone. A peculiarity of the common currency is that national central banks have remained in place, even though they have lost their decision-power on monetary matters. The official reason for their survival – when they are not in charge of financial regulation and supervision – is that they can relay useful local information. Presumably too, they are in a better position to explain monetary policy decisions to their citizens and their elected politicians. National central bank governors speak the same language as their fellow citizens, they operate closer than the Frankfurt-based ECB, they are aware of domestic debates and they understand national sensitivities. Some national central banks do make efforts to fulfil their advocacy role, but not all. Obviously, some Governors are concerned that public exposure might lead them to sing a different tune than the official one. Decision-making by consensus, which negates disagreements, undercuts the important advocacy function of national central banks. It deepens the democratic deficit.

None of this criticism is new. The ECB has consistently rejected such criticism. It claims to be fully transparent and therefore accountable. It claims that the minutes of its Governing Council meetings would not be informative, if only because the President faithfully reports the consensus view. That may well be true. Since no one knows exactly what goes on in these most secretive meetings, it is impossible to claim that there is no consensus. But the implausibility of a systematic consensus is witnessed by the occasionally sharp disagreements aired among observers. Secrecy strongly suggests that some important issues are hidden. Even if all is known, accountability does not just require transparency, it also calls for the willingness to engage into in-depth discussion with critics, which calls for far more than the usual restatement of known positions.

A significant degree of opacity, a communication that privileges statements at the expense of debates, a refusal to decide by voting, all these features bear at least some responsibility in the declining support for the euro. They make the ECB an easy target for politicians who look for scapegoats. Even if, for the time being, restricting the bank’s formal independence is fortunately not an option, informally the pressure is mounting and cannot fail to weigh on the decision process. For its own good, and for the benefits of the Euro-area citizens, the ECB ought to change its ways. The sooner, the better.

This column first appeared on http://www.eurointelligence.com. Our thanks to Wolfgang Munchau for permission to re-post it.