Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 11 November 2015

Europe’s other taboo: reform of the ECB

At a recent meeting of European economists I remarked that there were two big taboo subjects when discussing how the Eurozone might be improved. The first, which I have talked about before, is countercyclical national policies, which could include macroprudential monetary policies but which also must include fiscal policy. It is blindingly obvious that such policies, if implemented, would have put the Eurozone in a much better position before the 2010 crisis, but despite this the subject remains ‘off the agenda’.

The second taboo subject is reform of the ECB. Once again, it is pretty clear to anyone outside the Eurozone that since 2010 ECB decisions have been very poor, both in absolute terms and relative to their counterparts in the US, Japan and the UK. The three big errors are well known:

  1. A failure to introduce OMT in 2010, delaying it to September 2012

  2. Raising interest rates in 2011

  3. Delaying Quantitative Easing until 2015

No one disputes (2). Some say that (1) and maybe (3) were because the ECB had to wait until it was clear that particular countries were serious about undertaking ‘reforms’. This explanation raises more questions than it answers. The ECB’s remit does not extend to dictating national economic policies, but sometimes the ECB appears to think otherwise.

Alongside these big errors are many examples of ECB actions which are highly questionable, the most recent involving Greece. Imagine the Bank of England cutting off the supply of cash to Scotland if negotiations between the Scottish and UK governments were not going the way the UK wanted. Those who say the ECB was only following its rules neglect to observe that the ECB makes up its rules as it goes along. Even in more minor matters, actions of ECB officials which would do more than raise eyebrows elsewhere go on for years without anyone finding out.

One major error alone might not be enough to indicate reform, but three suggests that structural reform is essential. Yet the one structural reform no one in the Eurozone will talk about is at the heart of the Eurozone itself. The reason of course is also why no one will talk about countercyclical fiscal policy: it does not fit in with the dominant German narrative. What is a shame is that this taboo among policy makers is infectious: at the meeting where I talked about this taboo only one or two others mentioned the ECB.

This is a shame, because some imagination is required in thinking about ECB reform. A reasonably obvious change to make is to take monetary policy decisions away from the exclusive control of central bankers, along UK lines. But who would appoint any external members? Here we have a tricky problem - the lack of political union means that any political accountability may be too diffuse to be effective (as it is at present). But the point of this post is not to offer solutions, but to complain that not enough people are talking about the problem.


  1. "A reasonably obvious change "

    Another 'reasonably obvious' change would be to introduce some democratic control of these incompetent technocrats.

    It is one thing being ruled by democratically elected incompetents, quite another to be ruled by incompetent technocrats.

  2. Surely the real lesson of this is that we cannot trust technocratic structures to be right all the time. And therefore we cannot trust technocratic structures.
    If we dislike Osborne's fiscal policy we can vote for an alternative. But if we dislike monetary policy, the system in Europe is designed to protect the "independence" which really means unaccountability of the ECB.
    There is a basic reason to be pessimistic about prospects for change. National politics means that oppositions have to try to focus blame on their national government when things go wrong. So the ECB gets a free pass.
    Since independent central banks have had effective control of monetary policy we have had two (possibly three) bubbles and the greatest economic crisis since the war. Could these facts be related?

  3. I don't understand the last paragraph. Isn't the BOE quite independent? Do you mean allowing the European parliament or some sort of euro-zone council to change the inflation target?

    1. The UK MPC contains 4 members who are not employed by the Bank

    2. Because this other group of unelected technocrats are bound to be more competent than this group of unelected technocrats.

      What we need is a group of technocrats above them to make sure we appoint the right technocrats. Perhaps a technocrat committee of some kind, staffed with people from the University sector?

    3. No. It is a much more general point. Central banks have not proved good at running the economy. Their power should be gaken away.

  4. Surely, the key point here is that the Bank of England is only independent in an illusory way. It can’t do anything that the UK government doesn’t implicitly endorse as the government could sack the governor, cancel the bank’s ‘independence’ or make illegal any action by the bank of which it did not approve.

    Economists spent 30 years telling the rest of society that independent central banks focusing on reducing inflation would lead to economic nirvana. The ECB is the purest implementation of this nirvana. It is completely independent and completely disastrous.

    I notice that your design principle of having specialists usurp the democratic will had an outing over the weekend when a serving general expressed disquiet at the competence of Jeremy Corbyn to lead the nation in the event that he won an election. I hope you realise the type of company you are keeping in promoting technocratic decision making.

  5. As a central bank, there is not a lot wrong with the ECB. It handles the Euro settlement system quite well and is introducing additional settlement and clearing systems across Europe. You know, "technocrats" stuff that academic macro-economists / macro-astrologists, have not the faintest idea about.

    The major problem the ECB has is, it is not owned by one Sovereign fiat currency ISSUING Treasury, because such does not exist in the Eurozone. A Eurozone Treasury that by definition, would be the "Spender of First Resort". The Eurozone Treasury that spends EURO into existence; and, taxes them out of existence.

    The ECB is being forced to be monetary policy AND fiscal policy operator, at the same time. The rest of the world learnt decades, if not centuries back, that such a system does not work, never has, never will. Technically, it would be fairly easy to abolish an "interest rate setting monetary policy system" based on central banks, and replace it with real time dynamic fiscal policy (tax based inflation control). The problem is loads of dumb-arsed rent-seeking politicians; and, an even dumber "macro-media" and academia.

    PS. Did any of you go to Kilkenomics 2015, I missed it. I hear is was a cracker!

  6. Prof Simon,

    You claim (last para) that “lack of political union” would make appointing members to some non ECB committee difficult. Surely there are large numbers of EU committees doing all sorts of things (e.g. in relation to agriculture and fishing) where the EU manages to set up relevant committees despite EU countries never seeing eye to eye on matters agricultural etc.

    If you are arguing for some sort of merge of monetary and fiscal policy and for stimulus to be decided under that merged arrangement by that sort of committee, I don’t see the problem. Committee members just need to be qualified economists and to be given instructions like “make sure demand in the EZ is the maximum that is consistent with the 2% inflation target”.

  7. Perhaps it is another taboo, but is becoming more relevant. Early 2010, the EU (including the UK) faced another problem, in which the high nobles (London, Paris, and Berlin) should have sided in taking the lead, but the EU went into 30 directions. (28 member states, Brussels, and Frankfurt). The economic problem I see here is not austerity or so, but some kindergarten-economics: capacity-constraint and parting from options in choice. Increasing mobility of goods&services, persons, and capital had been prepared in part, but some unforeseen preparation had to be done on the way or afterwards, designed, developed & deployed. It was a huge claim on scarce priority and attention for decades, but Western Europe (WE, not US) had found a way to come to business with the supertrio, and then it embarked upon a huge expansion, an adolescent growth spurt like the USA had in the decades before Civil War. "No more war in Europe" excludes that Wild West solution for policy option. Then there was that crash that spoke English; in 2009 the EU did its job, and then there was this thing, and the EU snapped. It may not be a thing to be proud of that we were not supermen (Uebermenschen), but ostrich-policy is below my dignity. We had too much on our mind, struck at mental capacity constraint.
    From this angle, it is positive that the refugees-crisis shows a lead in the EU; not as vital and strong as one might wish, but back on its feet. From this angle, it is positive that the UK makes up its mind. Nothing can change it being a prominent member of the family, but it does not have to live in the house; CH has always been a member of the family, not living in the house. Of course, European integration may have to push further than the UK wants, but eventually an inner-union may emerge - e.g. because the eurosons get a common tax revenu - which effectively will make the UK a CH within the EU, unleashing the chain at Calais. Either way there is a solution, and no way will us bring back to Paradise; each leads to Rome.

  8. "A reasonably obvious change to make is to take monetary policy decisions away from the exclusive control of central bankers, along UK lines"
    Why? I thought the push was for bankers and the rest of our 'betters' control Is there a Solomon Shortage?

  9. The solution is to breakup the Eurozone.


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