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Prof. Otmar Issing

Member of the Executive Board of the European Central Bank
Speech to the European-Atlantic Group
House of Commons, London - 28 Jan 1999

Part 2

4. Central bank independence and accountability

While the fundamental approach to monetary policy-making is now fairly similar in the United Kingdom and in the euro area, some notable differences remain. The British public, in keeping with its long and proud parliamentary tradition, has - understandably - been particularly concerned with the issue of democratic accountability in the context of central bank independence. From this perspective, some commentators have criticised the ECB as being "too powerful", "undemocratic" and "accountable to no one". You will not be surprised to hear that I should like to take issue with that characterisation.

As explained above, it makes good economic sense to take the responsibility for the common good of price stability outside the direct, day-to-day influence of partisan politics. Moreover, it is perfectly democratically legitimate for society to delegate authority for a particular policy area to an institution outside the regular political process. Such an institution can and will only be held accountable effectively if it is given a clear and limited mandate. If monetary policy were instead to be called upon to serve a multitude of - usually competing - goals, the status of independence would be much harder to justify and the related accountability difficult to achieve.

The economic rationale for the democratic act of granting independence to central banks is the recognition that monetary policy can and should only be held responsible for the single overriding objective of medium-term price stability. If (and only if) it is agreed that price stability is a common good that should and must not be subject to the normal kind of trade-offs and value judgements which are the domain of the regular political process, would such delegation of authority appear to be wise and democratically legitimate.

In the case of the ECB, the primary objective of maintaining price stability is enshrined in an international Treaty, which would be rather difficult to change. Its quasi-constitutional character, while offering greater protection from political interference, does not mean that the ECB's mandate carries less democratic legitimacy. On the contrary, a Treaty concluded by 15 national governments and ratified by 15 national parliaments, in some cases endorsed in addition by a popular referendum, confers a profound and robust degree of democratic legitimacy. Once it is accepted that price stability is a lasting value and not simply a short-term objective, it appears quite legitimate to afford the ECB, as the institution entrusted with maintaining price stability, a high degree of legal protection.

Accountability is the reverse side of the coin of independence. Accountability in a democracy must ultimately be achieved vis-`-vis the supreme sovereign, ie the people whose interests the institution must be seen to serve. The accountability of an independent institution that is not subject to the regular political process, as argued before, requires, in particular, that the institution's mandate should be limited and clearly defined. Only under these circumstances can the performance of the central bank be monitored and evaluated effectively by the public.

The Maastricht Treaty has assigned the ECB the single, overriding, primary goal of price stability as the basis for accountability. Moreover, the Governing Council of the ECB adopted in October 1998 a quantitative definition of price stability as "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%". The clear definition of the ECB's final objective provides the European public with a precise benchmark against which to judge its performance, for which it can and will be held accountable.

The issue of accountability for the ECB's performance with respect to its clearly defined mandate needs to be logically separated from concerns over the transparency of the policy-making process itself (as opposed to the outcomes of this process). Transparency, openness and clarity about how the central bank sets out to achieve its mandate are also desirable, since they reduce the degree of uncertainty in the monetary policy process and help the public to understand and assess the central bank's actions.

Criticism that the ECB will not be accountable for, nor transparent about, its actions is misplaced, to my mind in most cases arising purely from a lack of information. Clearly, the ECB will not and cannot be held formally and directly accountable by governments. This would contradict the very notion of full institutional independence embodied in the Treaty. Besides, of course, a European government does not exist. Given that the ECB has a clear European mandate, any formal accountability vis-`-vis national governments and even national parliaments would run counter to the logic of a single and supranational European monetary policy. The ECB is, however, committed to a high degree of accountability for its monetary policy decisions and its performance in achieving price stability vis-`-vis the European public and its elected representatives.

The Treaty mandates the ESCB to submit quarterly reports as well as an annual report to the European Parliament, the Council of Ministers and the European Commission. These reports will be debated by the European Parliament. Furthermore, the ECB's President and Members of the Executive Board of the ECB can be questioned before the European Parliament's Committees.

In addition to the reporting requirements foreseen in the Maastricht Treaty, which are among the most stringent for any central bank, the ECB is committed to going even further in ensuring transparency and accountability. Most importantly, the President will hold an extensive press conference immediately following the first Governing Council meeting of every month.

A thorough assessment of the economic environment together with special articles on topical issues are also provided in a Monthly Bulletin. The first issue of the Bulletin appeared last week. In addition, there will be working papers and occasional papers presenting the analysis and research conducted by ECB staff for scientific review. The members of the Executive Board and other members of the Governing Council will further communicate with the public very actively through regular speeches and interviews.

The decision by the Governing Council of the ECB not to publish the minutes of its meetings and not to make public the voting behaviour of its members has been criticised in some quarters as a lack of accountability and transparency. In this context, one should recall that, for the purpose of accountability, what matters most will be the ECB's actual track record of stability performance. Moreover, the Governing Council will strive for a maximum degree of accountability and transparency regarding its operation as a collegiate/collective body and not with respect to individual members.

For that purpose it is essential to convey to the public a sense of the reasoning behind the decisions of the Governing Council and a coherent summary of the information upon which decisions are based. On the occasions of the President's press conferences, a detailed assessment of the economic situation and the outlook for price developments will be given every month followed by a question and answer session. A summary of all relevant information that would normally be expected to be contained in published minutes will therefore - for all practical purposes - be immediately available, together with an opportunity to pose further questions. This goes far beyond what most central banks are prepared to do in terms of communicating with the public.

It is not quite obvious to my mind that the legitimate and important cause of transparency would be advanced if central banks were to make available to the public the maximum amount of information at their disposal. You could perhaps imagine all data and records continuously being put on the Internet. You could, in addition, imagine live broadcasts of all Governing Council meetings, committee meetings, perhaps including the coffee breaks and all words uttered in the halls and corridors of power. George Orwell in reverse, if you will.

Apart from all practical difficulties, would such complete openness really enhance the general public's (and even the specialists') understanding of monetary policy? Moreover, could the public ever be sure that some important information was not withheld, some ulterior motives hidden, some decisions not revealed?

The Statute of the European System of Central Banks and of the European Central Bank stipulates that the proceedings of the meetings of the Governing Council shall be confidential, whereas the outcome of its deliberations may be made public. This is a wise decision both for reasons of internal efficiency of the decision-making process and the public's perception of it. Efficient decision-making requires a frank and open discussion (and subsequent voting) based on maximum objectivity in judging the available information and policy options with respect to fulfilling the Treaty mandate.

Experience shows that if individual statements during meetings are made public with the names attributed to them, a tendency simply to exchange carefully drafted - and possibly lengthy - statements can emerge. Thereby the free flow of discussion is likely to be inhibited. Similarly, voting behaviour may become more heavily influenced by tactical considerations and peer pressure rather than be based on the best judgement of the situation at hand.

Perhaps more importantly, the publication of individual votes would lead the public and financial markets to focus on individual voting patterns. The Maastricht Treaty prescribes that all members of the Governing Council serve in a personal capacity as representatives of the System as a whole and on a purely European mandate. National considerations must therefore play no role in the decision-making process.

It would be unrealistic to assume, at least for the initial years, that there would not be a risk that, in the public's perception, individual central bank governors would still be associated with their country of origin. This would inevitably invite pressures on individual members generated by national or local interests. Such pressures would be detrimental, even if they were firmly resisted. In fact, distortions in voting behaviour to "prove" that one was immune from national interests and pressures could be just as damaging.

Neither a "personalisation" of monetary policy in general, nor the specific risks of its "renationalisation" in the perception of the public would be helpful for establishing the reputation of the ECB as an independent and genuinely European institution which is collectively responsible and accountable for the health and stability of the single currency. I can assure you that the ECB will continuously strive for the maximum possible degree of openness and transparency in its monetary policy. This is in the interest of accountability vis-`-vis the European public. This is also in the interest of the effectiveness of monetary policy itself, which should be clearly understood by the public and the financial markets.

5. Transparency and the ECB's stability-oriented monetary policy strategy

The ECB's efforts to provide a high degree of both accountability and transparency are clearly reflected in its choice of monetary policy strategy. The importance of a precise definition of price stability as the basis for accountability with respect to the final goal of the ECB has already been discussed. I shall briefly review the other main aspects of the ECB's strategy below. Let me first point out, however, why we feel that a central bank needs a monetary policy strategy at all. This has a lot to do with accountability and transparency, but it also concerns the internal decision-making process of a central bank.

Monetary policy is not a simple task. The transmission from the monetary policy instruments through short-term interest rates and a variety of channels to the price level is complex and may vary over time. A monetary policy strategy provides a conceptual framework that structures the processing of the vast amount of information in order to provide guidance and decision criteria to policy-makers. In terms of communication with the public, the monetary policy strategy should help the public to understand and assess monetary policy actions.

The simple point to be made in this context is that openness will always be a matter of degree. It need not by itself necessarily lead to greater transparency, let alone be helpful for clarity and understanding. In the present information age we are all too aware of this. Anyone having "surfed the Internet" knows that the mere availability of information is not enough, the least that is required is a powerful "search engine" and then an ability to process and interpret the information properly.

This is also a problem faced by central bankers when deciding on the appropriate stance of monetary policy, and this is why a monetary policy strategy is required. This is also the reason why - thankfully - we central bankers (and human beings in general) cannot entirely be replaced by computers. The key for the degree of transparency and clarity is therefore not the amount of information made available to the public, but the degree to which the monetary policy strategy followed within central banks truthfully corresponds to what can be communicated intelligibly to the public. An old-fashioned word for this degree of correspondence would be "honesty".

The Governing Council of the ECB has adopted a monetary policy strategy which is neither conventional monetary targeting nor direct inflation targeting, nor a simple combination of the two. The manifold uncertainties in economic relationships accentuated by the very transition to a single currency pose substantial difficulties both for the stability of money demand as well as for the accuracy of inflation forecasts.

Making a strict commitment to adjust monetary policy mechanistically in response to deviations from pre-announced monetary targets (or inflation targets at some particular horizon) in a situation of such great uncertainty would have been unwise, misleading and not credible. There would have been a great likelihood that targets would either have to be frequently missed or ignored. Despite the virtue of simplicity, it is, moreover, doubtful whether all relevant information can be usefully summarised in a single indicator like a monetary aggregate or a single inflation forecast.

The "stability-oriented monetary policy strategy" decided by the Governing Council of the ECB comprises two pillars. First, a prominent role for money, in relation to which a quantitative reference value of 4=% for the growth rate of M3 was announced in December, and, second, a broadly based assessment of the outlook for price developments. Given that inflation is ultimately a monetary phenomenon, monetary aggregates are a natural first choice as a "nominal anchor" and guidepost for monetary policy. In the early years of monetary union, however, the relationships between money, prices and interest rates are likely to be subject to an exceptional degree of uncertainty.

While the basic longer-run relationship between money and prices has been shown to be robust across a wide range of policy regimes, it would be risky for monetary policy, in such a situation, to respond to short-term developments of monetary aggregates in a mechanical way. The notion of a reference value for money, as distinct from a monetary target, will provide an important benchmark against which to assess monetary developments and to judge and explain policy actions.

As the second pillar and in parallel with the analysis of monetary conditions, a comprehensive "broadly based assessment of the outlook for price developments and the risks to price stability" will be conducted. Some observers have wrongly taken this to be synonymous with an inflation forecast, which is customarily at the centre of direct inflation targeting strategies, and have called upon the ECB to publish such a forecast. However, the broadly based assessment undertaken under the second pillar of the strategy will comprise an analysis of a wide range of indicator variables as well as the use of various forecasts of the outlook for price developments. Publishing any single "official inflation forecast" would, therefore, not adequately reflect the actual decision-making process in the Governing Council of the ECB and - rather than enhancing transparency and clarity - would actually be confusing and mislead the public. Besides, the assumptions underlying various inflation forecasts may not be fully u nderstood by the public and the markets and could, under those circumstances, actually undermine the central bank's anti-inflation credibility.

For all the manifold uncertainties associated with the transition to Monetary Union, it is paramount that the ECB is understood to be strongly committed to and very clear about the final objective of price stability. This is the basis for its accountability vis-`-vis the general public. At the same time, the ECB will need to retain the necessary flexibility in interpreting and reacting appropriately to the available economic data. As described before, the ECB will go to great lengths to explain its policy decisions and the reasoning behind them to the public and thus will also aspire to the highest standards of transparency upheld by any central bank.

For the synopsis and the first part of the speech, please see Synopsis and Part 1 of Issing speech.

For the remainder of the speech please see Part 3

Last update: 25 March 1999

© Copyright Anthony Cowgill and Andrew Cowgill, 1999

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