The Notes to the Accountability of Central Banks (members of ESCB) and ECB

Ilona Bazantova

Abstract:

The aim of submitted thesis “Notes to the accountability of central banks (members of European system of central banks) and European central bank” is to clarify the term ‘accountability’ or ‘responsibility‘ on basis of theoretical and practical level. The first part is dedicated to the theoretical approach to accountability and explanation of basic terms. Analysis constructed of accountability indices is covered in the second part.

Key words:

Central bank accountability, Central bank independence, government, monetary policy, Czech National Bank, EU, European System of Central Banks, European Central Bank

Introduction

Traditional economic theory emphasizes central-bank independence, but mentions far less often the notion of accountability. The central bank is an institution with great economic power, which is exempt from the election test, but whose role is irreplaceable. This is why the legislator delegates the power to make monetary policy on it, knowing that its aversion to the risk of inflation will, for a number of reasons, be greater than that of the executive. Since the precondition of the central bank’s independence is the delegation of the monetary policy-making power on non-elected experts, some call for compensation of this democratic deficit. The standard rule (i.e. in the sense of democratic principles of law which are in force also in the legal systems of other democratic countries) is that the role, fields of competence… etc. of the central bank are regulated by law, and it is only through legislation that anyone can interfere with its activity. In a general definition of the notion of “independence” we should therefore speak rather about “legally determined rights and powers of the central bank, which cannot be interfered with ad hoc (by anyone)”.

As a member country of the European Union, the Czech Republic has used the “European criteria” of central-bank independence, based on the fundamental documents of the European Union (The Treaty establishing the European Community, as amended by the Treaty on European Union, the Maastricht Treaty as amended by the Amsterodam Treaty – hereinafter „Treaty“; and the Protocol annexed to the Treaty of EU on the Statute of the European System of Central Banks and the European Central Bank – hereinafter „Statute“), i.e. personal independence (Art. 14 of Statute); financial independence (Art. 101 of Treaty); institutional independence (Art. 108 of Treaty); functional independence (Art. 105 of Treaty). Nevertheless the Czech Republic is not a member country of the Euro area – the Czech Republic has own currency (“Czech Koruna”) and has independent monetary policy, representative the Czech National Bank (“CNB”).

Without questioning the importance of the above-mentioned definitions, we will nevertheless understand by the central bank’s independence the autonomy of the central bank in using the instruments of monetary policy (discount rates, required minimum reserves, open market operations, and other tools), which help to achieve the main objective set by the law, ordered by the executive in accordance with the law (or upon agreement with the executive), or set by the central bank itself.

In this view, central banks should not only be independent, but also accountable.

Forms of accountability of the central bank

Accountability can take different forms. The simplest way is a formal agreement between the government and the central bank, where the central bank has legal obligation to comply with the monetary policy objective. This system sets out both rewards and sanctions for the central bank and determines the conditions under which the central bank can “justify” its deviations from the set objective. There are also less formalized forms of accountability, e.g. those defined by the law only in broad terms or resulting from tradition (precedent-based), such as reports on monetary policy addressed to the Parliament, public hearings, regular press conferences, frequent informing of the public, explaining monetary policy objectives, etc.

For the purposes of this article, we will use the term “central-bank accountability” as a relationship between the central bank and the body that has delegated the monetary policy-making power on it. This can be the Parliament, if it has defined the central bank’s competences, the government, or any other body that legally sets the monetary policy goals. Apart from this particular monetary-policy accountability for achieving the objective, the central bank, as any other public or private entity having its own legal personality, is accountable for economical and lawful spending of operational costs. This accountability is embodied in the relation between the central bank and its owner (founder), or a person designated by the owner, on whom the control mechanism can be delegated.

It is impossible to agree with the opinion, that accountability means the central bank’s relation to the public, since the public is a notion without a clear definition. According to the theory of constitutional law, accepted in all democratic countries, the people (the public) exercises power through different bodies of the legislative, judiciary, and the executive. There are exceptions related to direct democracy, such as the referendum, which, however, are hardly applicable to monetary policy matters; and the legal system of the Czech Republic does not include any implementing statute on the referendum. It is therefore the Parliament and the government that central banks must be accountable to.

Moreover, we should not confuse transparency and accountability in monetary policy, or even reject accountability in the name of transparency. Transparency is a vital and integral part of the central bank’s credibility and a precondition for a smooth functioning of accountability; but it is also – in a way – a forced (by institutional background, public opinion, media pressure), one-way information flow of selected data, sometimes imposed by a generally accepted custom. The “recipients” of the information are not defined, they do not have the possibility to verify the data, and they do not even have to accept them, let alone provide some feedback.

On the other hand, the central bank’s accountability (in the broadest sense of the term), is a two- or multi-party relationship laid down in the law, between the central bank and the Parliament; Court of Auditors; executive; private auditors; the court (E.g a member of the ECB Executive Board can be retired by the Court of Justice (Statute, Art. 11.4). Even the ECB‘s acts or omissions are open to review by the Court of Justice (Statute, Art. 35, Art. 36.2; Treaty, Art. 230 – 241, 288), etc. There are clearly defined rules stating not only what an institution can do in a given situation, but also what it must and must not do. And it is accountability laid down in this way that – although it may sound a paradox – reinforces independence and legal security. Of course, the bodies to which the central bank is accountable must have a possibility of controlling, verifying, or asking for further information.

Methodologically, it is important to stress that the notion of accountability in monetary policy makes sense only if we accept the distinction between goal and operational independence of the central bank. In a situation where the central bank has full operational independence, but the objective of monetary policy is determined by the law, the executive, or any other body (or agreed with such body), the central bank is accountable for achievement of this goal. On the other hand, the bank is independent in choosing the instruments for pursuing the objective. If the central bank itself chooses not only its instruments, but also the objectives, the notion of accountability looses its sense, and so does any attempt at a meaningful and efficient democratic control of monetary policy.

Sometimes we may hear objections that the central bank’s accountability to the Parliament or the government is in conflict with the prohibition to give instructions to the central bank. The ban to give instructions, however, means a ban to give specific instructions, i.e. interference with the instrumental independence of the central bank. The government must not give the central bank orders concerning the instruments of monetary policy; it cannot order it when it should raise or cut interest rates or the required minimum reserves, or operate on the open market (although such institutional arrangement has been applied in a number of developed open market countries over the past and, in some of them, is still applied today). Setting a goal is, qualitatively, something different. The accountability for achieving a goal required by law, set by the executive, or agreed upon with the central bank cannot be understood, in our opinion, as interference with the central bank’s independence, just as international cooperation and coordination in monetary policy matters are not understood as restriction of independence.

Accountability indexes

Although independence and accountability are preconditions to each other (independence without accountability may be called willfulness), there have been much less accountability indexes for central banks. Nevertheless, some attempts have appeared. Briault, Haldane and King [1996] are an example. Their index includes four criteria: control exercised by the Parliament, publishing of the minutes from the Bank Board’s meetings, publishing of inflation and monetary development reports, and the possibility to annul or suspend the Bank Board’s decisions in the case of certain shocks. This index is merely illustrative and uses the scale (0 – 4). The more it shows, the more accountable a central bank is.

De Haan, Amtenbrink and Eijffinger [1998] set up a more detailed index, using thirteen criteria: whether the statute on the central bank sets out (1), puts in a clear order (2), defines (3), and precisely determines (4) monetary policy objectives; whether the bank publishes a report on inflation and monetary development (5) and the minutes from the Bank Board meetings in reasonable time (6), explains publicly to what degree the set objectives have been or have not been achieved (7); whether the central bank is controlled by the Parliament (8); whether the Parliament or government have the right to give the central bank instructions (9); whether it is possible to annul or suspend a Bank Board decision in certain cases (10), and the central bank’s right to appeal against such annulment (11); the Parliament’s right to change the legislation on the bank by a simple majority (12); and whether the legislation allows for dismissing the Bank Board members as a result of the outcome of their monetary policy (13).

When I describe the democratic deficits of the European Central Bank, I cite first place the procedure of setting the monetary policy objective. Apart from this deficit, we complain about five issues: the minutes from the European Central Bank Council meetings are not published; the ECB is only slightly accountable to the European Parliament; the processes of appointment and dismissal of ECB’s top officials are not satisfactory; there is no way for the EU executive to annul or suspend the ECB’s decisions; and the European Central Bank is not accountable in setting up its budget. In general, the author of this article agrees with Amtenbrink’s calling for more democratic accountability of the European Central Bank [Amtenbrink 1999], but the author of this article believes that it is not necessary to change the Treaty or the Statute of the European Central Bank in order to modify the mechanism of monetary objective setting. Critics may object that as long as the existing EU legal norms are in force, an institutional arrangement in which the central bank and the government have to agree on the objective of monetary policy cannot be accepted. But even the existing EU norms allow for quite broad interpretation, and it is often informal consensus, or the will of the representatives of the European Central Bank and EU executive to reach such consensus, that really matters. The agreement between the executive and the European Central Bank can indeed be interpreted as a fulfillment of the ECB’s duty to support the general economic policies in the Community.

My legal interpretation is based on Art. 105 of the Maastricht Treaty, which lays down the objectives of the European System of Central Banks as follows: “The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ECB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2: “Art. 2 of the Maastricht Treaty says that the Community has as its task to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment… sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance...“

The objectives of the European Central Bank are therefore numerous, although price stability is the primary one. The clause “without prejudice to” (the German “unter Wahrung aufgabe”) can by no means be understood as a condition. The European Central Bank is obliged to support the general economic policies in the Community at any circumstances, so that there is no prejudice to its primary objective, i.e. price stability. The word “primary” has to be understood as the first in a “horizontal” range of objectives, not as an absolute objective in a “vertical” line, to which everything else must be subdued at any costs.

Conclusion

The fear that if the situation where the objectives are set by the executive or agreed with the central bank is in conflict with the prohibition to give instructions to central banks (Art. 108 of the Treaty) can be dismissed by the interpretation of the legislation. In my opinion, this provision refers to the prohibition of specific instructions, i.e. interference with instrumental independence of the central bank (interest rates, required minimum reserves, open market operations, etc.). We believe that it is impossible to apply Art. 108 of the Treaty in a narrow sense, i.e. merely on the ECB’s objectives, as laid down in Art. 105 of the Treaty. Nevertheless, the ultimate decision depends on the interpretation by the European Union representatives.

Literature:

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Contact adress:

Doc. JUDr. PhDr. Ilona Bazantova, CSc.

Charles University in Prague, Faculty of Law

7 Curie Sq., 116 40 Prague 1

Czech Republic

e-mail: bazantov@prf.cuni.cz