Citizens' issues and visions for the future
- GOING DEMOCRATIC Ⓐ The European Central Bank should be more democratic given the power it has
- Ⓑ The European Central Bank has gone too far and should go back to its original mandate
- Ⓒ The European Central Bank should stop banks creating too much debt
- Ⓓ The European Central Bank should support the economy and citizens more directly
- Ⓔ The European Central Bank can’t do everything, governments must fully use their budgetary powers
- Ⓕ The European Central Bank should support the green transition
GOING DEMOCRATIC Ⓐ The European Central Bank should be more democratic given the power it has
- The European Central Bank (ECB) is the most powerful financial institution in Europe and it is accountable before the European Parliament. Nevertheless, this scrutiny is very limited when compared to the power the ECB has.
- This lack of accountability is due to the principle of central bank independence, the concept that central banks must operate independently of national governments to prevent them jeopardising financial stability by politicising their decision-making.
- While the European Parliament cannot make staffing decisions or set constraints on the ECB’s actions, it does scrutinise the bank by regularly quizzing the ECB President, adopting yearly progress reports, and taking positions on candidates to join the ECB Executive Board.
- Thanks to its independence, the ECB has large discretion to interpret its primary mandate, and it can even define its price stability target ; but the ECB does not use its power to act upon its secondary objectives, for example to support environmental protection.
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(Total reading time: 8 minutes)
The European Central Bank (ECB) is the most powerful financial institution in Europe. It has the ability to create money and inject it into the economy, and it can make decisions without the approval of national governments or the European Union (EU). This means that no person or institution has the ability to tell the ECB what to do or to stop it from doing something, with the exception of the European Court of Justice under extreme circumstances. If the eurozone economy crashes because of mistaken policy decisions, it will face no consequences for its actions.
The ECB is therefore operating largely outside the control of EU institutions and the 19 national governments which use the euro as their currency.
But if the ECB is so powerful, why are its decision makers not subject to the same rules of democratic oversight as other people and institutions who make important decisions that govern our daily lives?
The ECB’s accountability before any external government or institution is limited by a principle called “central bank independence”. This principle states that central banks should not be influenced by any interest outside of the bank when making decisions on what interest rates to set and how much money to create.
This principle was adopted by governments across the world to stop decisions on interest rates and money creation being influenced by election cycles.
By granting political independence to central banks, the hope was to prevent politicians from exercising pressure on central banks’ governors to make decisions which would get them short-term political popularity, at the expense of long-term economic stability. For example, central banks cannot directly finance the government's budgets.
Central bank independence offers a lot of room of maneuver for central banks to decide on monetary policy without having to consult or ask permission from elected representatives and governments. This situation was accepted because central banks had a very narrow mandate and limited tools at its disposal.
However, following repeated financial crises, the interventions of central banks are becoming increasingly significant. Some therefore argue the ECB has now acquired too much independence and should be held more accountable.
The EU Treaties define the ECB’s primary mandate — the goal it must aim for when making policy decisions. This primary mandate stipulates that the ECB must guarantee “price stability”. In practice, the ECB has defined price stability as keeping inflation close to but below 2 percent.
However, the ECB could autonomously change this by setting a higher or lower target. This means that the ECB, in practice, has a lot of discretion in reformulating its own mandate, which, in turn, leaves it vulnerable to the criticism that it “moves the goalposts” when it suits them.
The EU Treaties also specify the ECB’s secondary mandate, which is to support the general objectives of the EU as long as this does not prejudice its primary mandate. However, these “general objectives” are not precisely defined, as the Treaty mentions a variety of goals such as employment, environmental protection, technological innovation.
While the order of priority between the ECB’s primary price-stability mandate, and its secondary objectives is clear, these secondary objectives are themselves not prioritized. This could lead to the ECB having to make difficult trade-offs, when some governments would want the ECB to focus on one thing while other groups would prefer the ECB to do another one. This has put the ECB in an uncomfortable position more than once, with some arguing that the ECB is not really fulfilling its secondary mandate at all for this reason.
The role of the European Parliament
The European Parliament plays a limited role in scrutinising the actions of the ECB. While it cannot define the ECB’s actions, it does scrutinise them by having the right to question ECB officials during “monetary dialogues” every three months. During these parliamentary meetings, the ECB President answers questions from Members of the European Parliament (MEPs) on what the bank is currently doing or has done in the past. These meetings are public so citizens and journalists can watch the debates.
MEPs also produce an annual assessment each year on the ECB’s performance, through an annual resolution. These resolutions frequently criticise the bank’s procedures and recommend alternatives, but the ECB is under no obligation to act on them. Improvements have been made in recent years to increase the level of scrutiny which the ECB faces, including MEPs sending written questions to the bank, which the bank has to respond to. However, these changes have not manifested into strong oversight.
Lack of diversity
The ECB is also considered to be undemocratic in the way that its decision-makers are appointed. The ECB’s monetary policy is decided by 25 people who sit in the ECB’s Governing Council. Among them, 19 are appointed according to national procedures, and 6 others are appointed by EU institutions, through the so-called Eurogroup. The European Parliament also votes on whether to support or not support the candidate, however, this vote is merely symbolic as it cannot veto a candidate that it disapproves of. Members of the ECB’s Governing Council are usually appointed for long periods, from 5 up to 8 years.
The ECB is often criticized for the lack of diversity of its Governing Council. For example, today there are only two women among the 25 members of the Governing Council. Since 1998, the Council has never had any person of color, or from any ethnic minorities. Central bank decision-makers are often chosen on the basis of their academic pedigree or their experience in the financial sector. Lack of diversity in decision making bodies can often result in poor decision making, as the group may suffer from groupthink and lack of self-criticism.
In conclusion, while weak accountability of the ECB was considered to be acceptable as long as its powers were strictly limited and focussed on its primary mandate only. But with the growingly important role the ECB is playing, more democratic oversight of this institution is warranted.
Weak accountability of the ECB was justifiable as long as its powers were strictly limited and when it focused solely on its primary mandate. But today the ECB’s policies have far reaching consequences in the economy. Central banks should aim to align their policies with society's current priorities, rather than independently of them. But we cannot leave it to experts alone to decide what societal goods the central banks should support. This requires a more democratically accountable ECB.
What do you think?
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→ Proposal #14 Consultations with citizens