Beginners Handbook

Why is the ECB independent?

Both national central banks and the ECB are independent public institutions, which means their institutional setup has been designed to ensure a high degree of discretion and autonomy, and prohibition to take instructions from governments.

In practice, this independence of central banks means that:

• Central banks have total autonomy in setting their organisational setup, deciding their budget. 
• Central bank officials cannot take instructions from governments or EU institutions.
• Central banks are restricted from financing governments or EU institutions directly. 
• Central bank governors are appointed for a long period (from 5 up to 8 years) and are difficult to remove from office unless in extreme situations.

 

The idea is that by isolating central banks from political cycles, this would prevent elected politicians guided by short-term electoral interests to pressure the central banks to help governments, for example by lowering interest rates (which would help finance public spending). 

The independence of central banks became popularised in the 1990s, following the experiences in some countries like Germany where independent central banks were more successful in keeping inflation low. The independence of the European Central Bank, just like its mandate, was enshrined in the EU treaty in 1992, and can only be changed by unanimity of all 27 EU member states.

As a counterpart to its high degree of independence, central banks are accountable to the European Parliament and to the European Council. In practice, this means that the ECB has to justify and explain its decisions to the European Parliament (for example during the so-called “Monetary Dialogue” hearings, which are held every 3 months). The Court of Justice can also intervene (and has done so) in case the ECB is going beyond its mandate.