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European
Economic Perspectives 23
Alice's
Adventures
Should
the European Central Bank be more transparent and accountable? Willem
Buiter and Otmar Issing conduct a vigorous debate in the first two CEPR
Policy Papers.
The
adoption of a common currency by 11 of the 15 members of the European
Union is an act without precedent, which Willem Buiter describes as ‘a
bold step into the unknown, not unlike Alice’s fall down the rabbit
hole’. Although an enthusiastic supporter of monetary union, Buiter
sees serious flaws in the legal framework, institutional arrangements
and emerging operating practices of the European Central Bank (ECB) and
the European System of Central Banks (ESCB).
In
the first of CEPR’s new Policy Paper series, Buiter urges a number of
changes to the Eurosystem, which he argues are necessary to ensure the
survival of the common currency. Some require major constitutional
change while others relate to the ECB’s own procedures and so could be
made at the discretion of the Governing Council. In CEPR Policy Paper
No. 2, Otmar Issing, an ECB Executive Board Member and a former member
of CEPR’s Executive Committee, responds to Buiter’s critique,
arguing in particular that, in some respects, the ECB can already be
regarded as the most transparent and accountable central bank in the
world.
In
terms of constitutional changes, which require amendments to the
Maastricht Treaty, Buiter proposes:
•
Abolishing the ‘one-country-one-seat-on-the-Governing-Council’ rule;
and restricting the size of the Governing Council to no more than nine
members and the size of the Executive Board to no more than four
members.
•
Abolishing the clause in Article 109 giving the Council of Ministers the
power to formulate ‘general orientations’ for exchange rate policy,
because this clause creates doubts about the ECB’s operational
independence.
•
Charging the ECB explicitly with responsibility for systemic financial
stability in Euroland, with the phrase ‘lender of last resort’
entering the revised Treaty.
•
Creating a body that has the power to examine and make binding
recommendations about the ECB’s procedures. This supervisory body
could consist of MEPs and members of the European Court of Justice.
A second set of changes
that Buiter recommends does not require Treaty amendments, but neither
can they be implemented at the sole discretion of the Governing Council:
•
Striving for institutional arrangements and practices that allow better
coordination of monetary and budgetary policy in Euroland.
•
Fleshing out the ECB’s lender of last resort function prior to formal
recognition of this role in an amended Treaty.
•
Spreading the message that authority in the ECB/ESCB is centralized.
National central banks are useful conduits for national information and
their research departments provide safeguards against intellectual
‘democratic centralism’. Beyond that they have no substantive
authority. Yet there remains unnecessary uncertainty in the markets and
among the public about their role, according to Buiter.
•
Strengthen the role of the European Parliament as an interlocutor of the
ECB.
The third set of changes
Buiter proposes could be made by the Governing Council itself:
•
Abandoning attempts to create a culture of ‘collective
responsibility’. The presentation of a united front to the outside
world adds to uncertainty about the likely future stance of monetary
policy, Buiter argues.
•
Publishing the minutes of meetings of the Governing Council and its
relevant committees and sub-committees.
•
Publishing the individual voting records of Governing Council members.
•
Clarifying the operational inflation target.
•
Publishing the inflation forecast.
Otmar Issing responds to these proposals by noting that in order to make
sense of reality, monetary policy-makers – like anybody else – must
filter, process and structure relevant information and interpret it on
the basis of a coherent frame of reasoning. This is the purpose of
adopting a monetary policy strategy that serves as a guide both for
internal decision-making and for external communication with the public.
Transparency and accountability, he argues, need to be discussed against
the background of the stability-oriented monetary policy strategy that
the ECB has actually adopted and not as if it were pursuing some other
strategy, such as direct inflation targeting.
Issing
stresses the need to distinguish accountability and transparency, while
recognizing that both are crucial for the effectiveness of monetary
policy and the success of the monetary union over the longer term. He
suggests thinking of accountability as related primarily to the ECB’s
fulfilment of its Treaty mandate and its quantitative definition of
price stability. Ultimately, the ECB’s performance will have to be
judged by ‘deeds’ – observable policy outcomes.
By
contrast, transparency is primarily to do with ‘words’ – the
attempt to communicate clearly the reasoning behind policy decisions to
the wider public. Complete transparency is impossible to achieve in
practice, and the effort to achieve it must balance the public’s
‘right to know’ with its ‘need to understand’, Issing argues. It
is not simply a question of making available the maximum amount of
information. Clarity is also required to help policy-makers and the
public make sense of monetary policy.
Issing
believes that in order to foster both accountability and transparency,
the ECB has gone far beyond the already exacting reporting requirements
of the Treaty. This reflects the conviction that in a democratic
society, accountability is the ‘reverse side’ of central bank
independence and that transparency, to the extent that it helps the
public clearly understand monetary policy, will enhance policy
effectiveness and reduce uncertainty.
Issing
also responds to Buiter’s specific proposals to enhance ECB
transparency and accountability:
•
Abandon attempts to create a culture of collective responsibility? There
are inherent limits to individual accountability of members of a
collective decision-making body. Moreover, a balance has to be struck
between providing adequate individual incentives and the need for
effective collective decision-making. Excessive focus on individuals,
rather than on the institution as a whole, may render the policy signals
more and not less difficult to interpret. Developing a common culture
and speaking a common ‘language’ for external communication is
especially important for a new institution in a multi-country monetary
union.
•
Publish minutes? The ECB President’s monthly press conferences
immediately after Governing Council meetings plus the comprehensive
information provided by the ECB’s Monthly Bulletins come very close to
providing ‘summary minutes’. They represent a quite unprecedented
degree of instant ‘hands-on’ accountability, where the arguments
underlying the decisions of the Governing Council (but not individual
‘opinions’) are explained and exposed to public scrutiny. Issing
argues that this may well be preferable to publishing carefully edited
official minutes, which are usually provided with considerable delay.
•
Publish individual voting records? This would not be sufficient for
substantive individual accountability, which would also require
revealing the arguments underlying individual votes. Few people go as
far as advocating the publication of attributed minutes or verbatim
transcripts, since the effectiveness and coherence of internal
discussions would suffer. In any event, the validity of dissenting views
can never be verified conclusively even ex post. So the potential
benefits of publishing votes are limited, even under the questionable
model of individual accountability, while the risk of confusing policy
signals is not negligible. Moreover, the perception of policy will
inevitably continue to be coloured by national frames of reference.
Issing concludes that publishing votes would impose an unbearable
asymmetry in the burden of proof on individual decision-makers seeking
to demonstrate that a particular vote had not been influenced by
national considerations
•
Clarify the operational inflation target? The ECB, Issing notes, simply
does not have the sort of operational inflation target used in
strategies of direct inflation targeting. The quantitative definition of
price stability should serve as a basis for accountability. The
stability-oriented strategy used to achieve the ECB’s objective over
the medium term rests on two pillars: a prominent role for money –
captured by a reference value for money growth – and a broadly based
assessment of the outlook for price developments and the risks to price
stability.
•
Publish the inflation forecast? Issing notes that in contrast to direct
inflation targeting, the ECB strategy does not attempt to condense and
present all relevant information through a single inflation forecast.
Direct inflation targeting, moreover, does not by itself solve the
transparency problem. A single forecast can never represent a full
summary statistic of all relevant information, nor does it obviate the
difficult task of explaining how the forecast was arrived at and how it
is joined with further judgement in determining actual policy decisions.
The role of forecasts under the ECB’s stability-oriented monetary
policy strategy is quite different and much less ambitious. To pretend
otherwise would be a disservice to clarity, transparency and
accountability, Issing concludes.
This
article discusses the first two CEPR Policy Papers: ‘Alice
in Euroland’ by Willem Buiter (No. 1); and ‘The
Eurosystem: Transparent and Accountable (or “Willem in Euroland”)’
by Otmar Issing (No. 2). Buiter is at the University of Cambridge, a
member of the Bank of England’s Monetary Policy Committee and a
Research Fellow in CEPR’s International Macroeconomics programme;
Issing is an Executive Board Member of the European Central Bank and a
former member of CEPR’s Executive Committee.
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