The European Central Bank rules in a democratic void

The European Central Bank is holding together a poorly-designed monetary system in difficult circumstances. But this does not justify the fact that democratic governments have no way of holding it accountable.

The European Central Bank (ECB) has a poor record of acting late and without creativity. Not only was the ECB slow to cut interest rates after the global financial crisis, in 2011 it acted against the tide and initially raised them twice. It then took more than half a decade longer than the US Federal Reserve and the Bank of England to get around to ‘quantitative easing’, which is when a central bank buys assets, usually government bonds, with the money it has printed or created electronically and pumps this extra money directly into the financial system. Most damaging of all, European policy-makers insisted on austerity programmes that resulted in still weaker growth and even higher levels of unemployment. Yet any form of accountability is starkly missing.

The euro, although ‘a currency without a state’, is backed by significant political and even state-like commitments. That the euro must be saved at all costs is an imperative suggested not only by Mario Draghi, the technocrat, but Angela Merkel, the statesman. Political elites, particularly in Germany, have staked their legacy on its success.

But there is a growing mismatch between the monetary and fiscal sides of the Eurozone governance system and this has led to a number of problems. The main problem is that, while we may not find it is easy to live with the ECB, we cannot live without it. Yet when we look at the various Greek bailout packages it is easy to conclude that they have failed. The austerity imposed by the troika of the International Monetary Fund (IMF), the European Commission and the ECB has led to a severe contraction of output, with highly adverse impacts on welfare. This was intended, in a way, to punish Greece for its profligacy, rather than serve as a way out of the crisis.

The least accountable central bank

The ECB is far more independent than the US Federal Reserve, whose legal status is much weaker. In addition, the Federal Reserve is directly accountable to Congress and the government. The ECB was supposed to be like the German central bank, the Bundesbank. The Maastricht Treaty, which defines the role of the ECB, says that the ECB’s primary mandate is to maintain stable prices.1 However, the ECB has failed to emulate the distinctive attributes that have made the Bundesbank so successful, such as accountability and interdependence with other democratic institutions. Although the ECB can justly claim to have held together a poorly-designed system in difficult circumstances, its mission creep is its own responsibility.

The ECB is, in fact, the least accountable central bank among those in advanced nations.2 There is no democratic accountability when the ECB strong-arms governments into policy actions that go well beyond any reasonable interpretation of its mandate. Not only is the ECB shielded from politicians, the ECB’s statutes have also placed it beyond the reach of democratic rules on bad behaviour. The ultimate control politicians have over a central bank is the power to change its statutes and the power to appoint governors. For example, in the case of Germany, a simple majority in the Bundestag can change Bundesbank law. This procedure is absent in the Eurozone. The statutes of the ECB can only be changed by revising the Maastricht Treaty, which requires unanimity among all member states. The ECB argues that the only institution that has the right to limit its power is the European Court of Justice, which has a strong Europhile interpretation of European treaties. The global financial crisis that has resulted in the eurocrisis has given the ECB Governing Council such increased power that no national government or national institution can match it.

Direct supervision

The Eurozone is regarded as elite-driven and is fast losing democratic legitimacy among European citizens. It is facing left and right wing opposition in most of the single currency zone. Run by an unaccountable bureaucracy, the ECB epitomizes this perceived ‘democratic deficit’, posing serious problems for the future of the euro.

The project of European integration was not designed democratically, or at least not in the way democracy is traditionally conceived in terms of placing ultimate law-making authority in the hands of the people or their elected representatives. It is not even meant to be democratically responsive in the way that this term is usually understood. Any democratic deficit that the EU suffers seems to be deliberately constructed.

So how can we control the ECB in the future? Firstly, the ECB needs to be placed under stricter and more direct supervision by democratically-elected politicians. One of the institutions the President of the ECB puts himself in front of, the European Parliament, does not inspire anyone to believe that the ECB is being held accountable. The ECB’s independence means that democratic governments have no way of holding it accountable if it starts to violate its mandate.

A revised Maastricht Treaty mark two would need to look at the proper oversight of ECB activities. One possibility is to create a supervisory committee composed of members of national parliaments and the European Parliament, which would have the ability to dismiss members of the ECB Governing Council before the end of their term, if the majority of the supervising board considers the member to have failed to do his/her job. This would make Governing Council members accountable to democratically-elected politicians. It may also be wise for other Eurozone countries to emulate the German constitutional court model with its potential to hold the ECB to account.

Notes:

1. And “where it is possible without compromising the mandate to maintain price stability”, the ECB will also support the “general economic policy of the EU”, which includes, among others, “steady, non-inflationary and environmentally friendly growth” and “a high level of employment” – however, the emphasis is on price stability.
2. Werner, R.A. (2006) ‘A comparative analysis of the independence of the ECB, the Bundesbank and the Reichsbank.’ International Finance Review, 6, 1–16.