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
