The Political Economy of European Central Bank Independence

Frankfurt - Deutsche-Bank - 21. Juni 2013 - 06
The Political Economy of European Central Bank Independence - Anette Konar


On January 1, 1999, eleven of the European Union's fifteen member states entered into an Economic and Monetary Union, (EMU). With EMU, member states have one single currency, the Euro, and one common monetary policy determined by the European Central Bank. Such a union has been on the European political agenda for many years, but it has not been easy to achieve.

There are some obvious advantages to an economic and monetary union. With a single currency, there are no exchange rates to consider, transaction costs will be reduced, competition will increase, and trade will be enhanced. This, it is hoped, will foster growth in Europe and help European companies to become more competitive in international markets. The single currency, the Euro, will be a world class currency, giving more stability to the international monetary system. Thus, in the current period of international crisis, the success of the Euro is important not only for Europe, but also for the rest of the world. European growth and prosperity is a necessity if the global economy is to prosper.

However, the creation of the EMU is not only an economic adventure; an enormous amount of political capital has been invested in the project. For most of the nineties, participation in EMU has ranked first among the economic and foreign policy priorities of most European governments. Euro hopefuls have taken often drastic measures to conform with the Maastricht criteria. Taxes have been raised, budgets cut, monetary policies tightened and painful structural reforms justified as a "sacrifice for Maastricht." Thus, the success of EMU is very much a political goal.

However, the EMU structure is likely to lead to conflict between supranational institutions and national governments. The European Central Bank, (ECB), is the governing body of EMU and the still-existing national central banks. The ECB is the Union's ultimate monetary authority and is to be independent. This means that national governments cannot influence the ECB when it sets monetary policy for member states. So why should this be a problem? Monetary union does not presume political union.

Member states' fiscal policies need not be coordinated, but will continue to be set by national governments according to national needs and priorities. In other words, monetary policy lies in the hands of a supranational institution, the ECB, whereas fiscal policy will still be controlled by individual national governments. This division may seem clear enough, but it is not as simple as it initially appears.

Monetary policy refers to the choices made by the central bank regarding the money supply. Through controlling the money supply, the central bank also controls interest rates, which in tum influence the level of economic activity. For example, when the money supply increases, interest rates decrease and this may lead to inflationary pressures. The central bank's main goal is to control inflation, and this it does by regulating the money supply and interest rates.

Fiscal policy entails the choices made by the government regarding levels of taxation and government spending. When analysing any change in fiscal or monetary policy, it is important to keep in mind that these policies may not be independent of each other. A change in one can influence the other. This interdependence may alter the impact of a policy change. Therefore, the division of responsibilities between the ECB and national central banks (NCBs) and governments has the potential to lead to both economic and political disagreements.

This paper will look at the consequences of division of powers in economic policy setting, and at how these are affected by the fact that the ECB is independent. It aims to give an indication of the different political and economic effects stemming from ECB independence. However, it will keep in mind that it is very hard to draw any precise conclusions since no similar events have taken place in the past and thus there are no observations to draw from.

The paper will start by giving an account of the debate over Central Bank independence and the difficulties involved in defining this concept. It will then examine whether or not the ECB is truly independent. Finally, it will describe the different effects an independent ECB may have on national central banks, governments, the economy in the Euro area and political problems such as credibility, accountability and democracy.

1: Defining Independence

No clear definition of central bank independence exists in the literature today. Independence is hard to measure since no single indicator exists that can properly take into account all relevant aspects. However, while the precise meanings attributed to the term vary from author to author, they all share more or less the same characteristics.

A comprehensive definition is given by Eijfinger and De Haan and refers to a relationship between the central bank and the government that is comparable to that between the judiciary and the government. Although the judiciary can rule only on the basis of laws enacted by the legislator, it may act freely within the framework provided by such laws, and therefore enjoys a degree of independence.

In order for a central bank to be independent, there are, according to this definition, three areas in which government influence must be either excluded or drastically curtailed: independence over personnel matters, financial independence and independence with respect to policy.

Personnel independence refers to the influence the government has in central bank appointment procedures. It is not completely feasible to exclude government influence in appointments to a public institution as important as the central bank. However, the level of this influence may differ. It can be discerned by criteria such as the presence of government representatives on the central bank board, as well as government influence over appointment procedures, the duration of terms of office, and powers of dismissal. Sufficiently long terms of office are an important element for protecting central bank autonomy. Short terms of office could make the directorate of the bank more vulnerable to opportunistic political pressures because of the uncertainty of reappointment. In addition, short terms increase the likelihood that every government will appoint a new central banker, and this increases volatility in the conduct of monetary policy.1

Financial independence refers to the ability of the government to finance government expenditure either directly or indirectly through central bank credits. Direct access to central bank credits implies that monetary policy is subordinate to fiscal policy. Indirect access may result if the central bank is cashier to the government or if it handles the management of government debt. In either case, the central bank does not have financial independence.

Policy independence refers to the maneuvering room given to the central bank in the formulation and execution of monetary policy. In this case, it is useful to distinguish between independence with respect to goals and independence with respect to instruments.

With respect to goals, two related issues are important; the scope the central bank has to exercise its own discretion and the presence or absence of monetary stability as the central bank's primary goal. If the central bank has been assigned various goals, such as low inflation and low unemployment, it has been accorded the greatest possible scope for discretion. In this case, the central bank is independent with respect to goals, because it is free to set the final aims of monetary policy. It may, for example, decide that price stability is less important than output stability and act accordingly. If, however, it is given either general or specific objectives with respect to price stability the central bank's discretionary powers will be restricted.

To achieve its goals, a central bank must also wield effective policy instruments. A bank is independent with respect to these policy instruments if it is free to choose the means by which to achieve its goals. It is not independent if it requires government approval to use policy instruments. (If the central bank is obliged to finance budget deficits, it also lacks instrumental independence. In this regard, financial independence and instrumental independence are related. Instrumental independence is, however, much broader because it also includes the power to determine interest rates.) It is possible for a central bank to have no independence with respect to goals (which are then set by the government), but to be fully independent to choose the methods by which to achieve such goals; in other words to have independence with respect to instruments.

2: Is the ECB independent?

The independence of the ECB is codified in several articles of the Statute of the European System of Central Banks' and of the European Central Bank (hereinafter the Statute) and in the Maastricht Treaty (hereinafter the Treaty). The Statute is contained in a protocol to the Treaty and thus has constitutional value. This means that they can be changed only by a modification of the Treaty, unanimously agreed and ratified by all Member States. Article 107 of the Treaty reads:

When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision­making bodies of the ECB or of the national central banks in the performance of their tasks.

Besides this explicit statement of ECB independence, it can be inferred from several other articles in the Treaty and the Statute. The Statute is contained in the Treaty's chapter on monetary policy which is separate from the chapter on economic policy. In the latter chapter, Article 102a states the general principle that member states shall conduct their economic policies according to the objectives of the Community, as defined in Article 2 of the Treaty. However, the ECB does not have to obey this general principle for two reasons: first, its regulations are not contained in the rules on economic policy, so monetary policy is regarded as partially distinct from economic policy; second, its own support for the objectives of the Community is codified in Article 105, where the condition of no conflict with the objective of price stability is explicitly stated.

Several additional safeguards of the ECB's independence exist. Article 106(2) states that the ECB has legal personality. This means that the ECB shall enjoy in each of the member states the most extensive legal capacity accorded to legal persons under its law, and it may, in particular, acquire or dispose of movable and immovable property and may be a party to legal proceedings. Article 107 states that neither the ECB, nor any NCB, nor any member of their decision-making bodies can seek or accept instructions from the Community, or any national or local government, and that, at the same time, the Community, national and local governments undertake to respect the principle not to influence the ECB or NCBs.

Thus it is clear that from a legal standpoint the ECB is independent when setting monetary policy for member states. But is it independent in practice? To provide an answer to this question the different components of central bank independence suggested by Eijfinger and De Haan will be considered.

Regarding the independence of personnel Eijfinger and De Haan looked at appointment procedures, terms of office, and possibilities of dismissing the central bank executive board. The ECB is made up of an executive board and a governing council. The governing council consists of the members of the executive board and the governors of NCBs (Article 10.1 of the Statute). The executive board consists of the president of the ECB, a vice-president and four other members (Article 11. l). Its members are recommended by the council, following consultation with the European Parliament and the governing council, and their appointment is confirmed by the agreement of members states' governments (Article 11.2). The terms of employment for the executive board are decided by the governing council (Article 11.3) and the members can only be dismissed by the Court of Justice (Article 11.4). The term of office for the president of the ECB is eight years. The eight-year term is longer than that of NCB presidents in most member states and should be sufficiently long to assure policy stability. Thus, it seems, on paper at least, that the ECB is truly independent in personnel matters.

But in reality, some member states have more say than others. When electing the first ECB President, the debate was little more than a political struggle between France and Germany, each of whom wanted "their" candidate to get the job. Germany backed the Dutchman Wim Duisenberg despite France's objection. The French President, Jacques Chirac, then threatened to tum the appointment into a controversial struggle until Duisenberg said that he would step down in 2002, halfway through his eight-year term, to pave the way for the Frenchman Jean-Claude Trichet. However, after the ECB officially opened on June 1, 1998. Duisenberg told the Dutch newspaper NRC Handelsblad that there was no deal: "If I want to stay eight years, I will stay eight years." It remains to be seen if he will be able to do so without a serious political battle.

Regarding financial independence, the criterion outlined by Eijfinger and De Haan is whether or not the government can finance government expenditure either directly or indirectly through central bank credits. Article 21.1 of the Statute states that:

In accordance with Article 104 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

Furthermore, Article 104b of the Treaty prevents the Commnuity or any member state from bailing out any other member state with a deficit. Thus, the ECB enjoys full financial independence.

The final type of independence mentioned by Eijfinger and De Haan is that of policy independence, that is whether or not the central bank is free to determine which goals to pursue and what instruments it can use to pursue these goals. The oyeral1 objective of the ECB as set out in the Maastricht Treaty is to maintain price stability. The Governing Council is to formulate policy and the Executive Board is to implement it (Article 12.1 of the Statute). Since the main objective is already established in the Treaty, the ECB does not have full policy independence. Having price stability as the main objective for monetary policy generally means announcing a planned path for the price level and then adjusting the money supply when the actual price level deviates from the target. Therefore, in practice, the ECB does not seem to have much scope for choosing its instruments, but as this is not regulated anywhere, the ECB has formal independence when it comes to choosing its instruments.

As a general conclusion it would seem that the ECB is independent, at least on paper. However, its independence will probably not be truly tested until economic circumstances force the ECB to make unpopular decisions. It will be then, if the ECB is able to withstand political pressure to change its policy from the Community and individual member states, that it could be concluded that the ECB has true practical independence.

3: Why is independence desirable?

It is often argued that a high level of central bank independence, coupled with an explicit mandate that the bank aim for price stability, is an important institutional device for maintaining low and stable inflation. Empirical studies show that, while an independent central bank is neither a sufficient nor a necessary condition for price stability, a country with an independent central bank will, ceteris paribus, have a lower rate of inflation than a country where politicians steer the central bank's policy.' Researchers have also found that there is no relationship between central bank independence and real economic activity. In particular, central bank independence is not correlated with average unemployment, the volatility of unemployment, the average growth of GDP, or the volatility of real GDP. Thus, it seems as though central bank independence offers countries the benefit of lower inflation without any apparent costs.' Because of these findings, many countries have rewritten their laws in order to give their central banks greater independence.

Moreover, having an independent central bank is said to stabilise monetary policy and having a stable monetary policy aimed at low inflation is considered to be an important condition for sustainable economic growth. Most empirical studies, however, show that central bank independence does not enhance economic growth or employment. Also, there is no proof that countries with relatively independent central banks have lower costs of disinflation than those with more dependent central banks. Indeed, most studies suggest that central bank independence is associated with higher disinflation costs.'

Hence, central bank independence is not necessarily beneficial, but because of the difficulties in measuring its effects, and indeed, in measuring independence itself, it is hard to draw any solid conclusions. The events in an economy that can be observed and measured are the results of the interaction of many different factors and it is hard lo say which factor made the difference. These difficulties notwithstanding, this paper will now go on to describe some of the likely effects of ECB independence.

4: Effects on National Governments


The ECB is responsible for monetary policy, but responsibility for fiscal policy still lies in the hands of national governments. The EMU does not presume a political union, so fiscal policies of member states need not be coordinated. For instance, common decisions on overall taxation levels or on the balance of taxation, such as that between direct and indirect taxation, or between capital and labour, are not required. Instead, these will continue to be set according to national needs and priorities, in line with the principle of subsidiarity. It will also remain the responsibility of governments to keep budgets in check.

Governments did not actually control monetary policy before joining the EMU, but the degree of independence of the NCB varied between member states, and member states also had more direct control over their NCB, through setting its policy rules and goals. Now, all member states must follow the monetary dictates of a supranational institution, the ECB.

One effect of handing over monetary policy to the ECB is that it will be more difficult for governments to "keep an eye on" the economy. Pre-Euro economic policy meant monitoring trade balances, the balance of payments and the foreign exchange and interest rate markets. Governments thus received constant feedback on key indicators affecting national economic performance and could react accordingly. Most of these indicators have now disappeared on a national level even if they remain on the Euro-wide level. If fiscal and economic policies were coordinated among the Member States, things would be easier, but this has not yet happened.

Another, and probably more important, effect is that governments can no longer use the tool of budget expansion, i.e. creating income and employment opportunities through increased government spending, which may imply an increased money supply and higher inflation, in order to alleviate domestic economic difficulties. This method is criticised by those who believe that Europe's unemployment is largely structural, and that therefore governments should make structural changes, such as changes in labour laws and social benefit systems, to make a long term difference to unemployment rates, rather than solving their problems through increased spending.

However, it is important to notice that over the last few years leftist parties and coalitions have achieved parliamentary majorities throughout Europe, and these political ideologies are usually in favour of using monetary policy as a short-term solution for immediate social problems. Left-wing governments traditionally worry much less about inflationary pressures than they do about unemployment statistics, and they think that central banks should focus on output and jobs instead of inflation.' The leaders of these new European governments, particularly Germany's short-lived finance minister, Oskar Lafontaine, have vociferously demanded an accommodating monetary policy. The Germans even went so far as to threaten disregarding the three percent budget deficit limit of EMU. The ECB responded negatively and tough negotiations reportedly ensued, apparently resulting in an agreement to expand monetary policy while maintaining unchanged fiscal policies.10 This outcome could, in one sense, be interpreted as a triumph for the ECB which was able to maintain its independence. However, in another, it could be seen as a failure, that is, if negotiations actually did take place and compromises were made. Most importantly, it is necessary to realise that differences in political conviction may well lead to the ECB being set on a collision course with politicians in member states.

Since the birth of the ECB, European governments have made several statements and recommendations, some of which have bordered on the line of orders, as to how they think the ECB should manage the Community's monetary policy. This is most certainly an attack on the ECB' s independence and goes against member states' Treaty obligations to respect the independence of the ECB. So far the ECB has responded negatively to all suggestions and even stated that discussions with national governments are not possible. The ECB has to be firm in order to establish once and for all the independence which is so important for the success of its monetary policy. However, there is a risk that when appropriate government suggestions are made the ECB may not consider them just to prove its independence.

Many experts have expressed their doubts concerning the possibility of combining a centralised monetary policy with independently decided national budgets." One step toward coordinated fiscal policies was taken with the Stability and Growth Pact which gave some fiscal powers to the European Council. This pact is meant to guarantee budgetary discipline amongst members of the Euro-zone by using a system of multilateral surveillance and sanctions if convergence targets are not met. A punitive set of rules will put pressure on member states to avoid excessive deficits or to take measures to correct them quickly if they do occur. It is hoped that these mechanisms will encourage sustainable convergence of national economies, leading to lower interest rates and stronger economic growth.

But the fact remains that while the ECB is responsible for monetary policy, fiscal policies, as well as other macroeconomic policies, are conducted at a national level. This creates a serious risk of conflict between governments and the ECB. These conflicts will most likely arise when economic conditions diverge within the Euro area. Inevitably, the difficulties in coordinating different national policies with the monetary policy of the ECB will create tensions and disagreement.12 Of course, the same thing may happen within a nation between the government and the NCB, but the intensity of the conflict is likely to be greater in Euroland because national governments bear political responsibility for deteriorating economic conditions whereas the ECB will not be so straightforwardly accountable.

According to some observers, in the event of economic instability, the fact that the ECB does not control all macroeconomic policies may have serious consequences, possibly turning the Euro into a weak currency. If the Euro is a weak currency, then all the benefits it is meant to bring to member states, such as increased competition, enhanced trade, and lower unemployment, will be lost. This will certainly lead to discontent among member states. Therefore, these observers say, the EMU cannot survive without becoming a political union."


If powerful sectors in society are displeased with the monetary policy decisions of a national central bank, they have considerable powers of counter-pressure. They can, for example, put pressure on the government, which normally has some reserve powers and last resort ability to over-ride the central bank. More generally, a national central bank cannot disregard public opinion in its own country. But with an international central bank, the ECB, and in the absence of an integrated international political authority, the monetary authority is more remote and the possibilities of intolerable strains arising concomitantly greater. Conflicts will inevitably arise and yet the system does not contain a mechanism by which they can be resolved. As long as ultimate political responsibilities remain with national governments they will be under a compulsion to protect their citizens from what might be considered unreasonable hardships imposed by a remote caucus of bankers. However, if they try to use fiscal policy for this purpose, they might well have difficulties in borrowing the necessary money, because European capital market financiers might consider their deficits to be excessive. In such a situation there might be no acceptable way out and EMU might well be regarded as the problem. Thus, pressure to leave the system, or insist on a drastic change in its nature, would be irresistible.

If several countries came to feel that a change was necessary, there would be a number of alternatives open to them. They could join together to insist that the ECB should follow detailed objectives fixed by themselves collectively, so effectively ending the ECB' s independent control of monetary policy. They could also impose barriers to trade and financial transactions, treaty obligations notwithstanding, or try to introduce protective devices which would nullify the ECB's policies. As a last resort, in spite of the legal and political difficulties involved, they could secede from EMU." The costs of withdrawing from the single currency and re-establishing a separate, national currency might, in reality, not be as large as sometimes thought. If the central political incentive for remaining within the monetary union were to disintegrate, the costs of moving from a single to multiple currencies would be of second-order importance.

However, leaving EMU would mean reneging on an international treaty, and, some argue, it might even mean having to leave the European Union and losing access to the single market. This would not help to rebuild confidence for the reinstated national currency and would most likely make any country think twice before leaving the EMU. The legal and economic problems would simply be too great."

Thus, the difficulty of leaving EMU depends on to what extent the laws on the ECB can be regarded as immutable, and this, in tum, depends on the interpretation of the status of the Maastricht Treaty since it is there that the Statute of the ECB is inserted. On one hand, the Maastricht Treaty has the status of any other international treaty, which countries can reject unilaterally. On the other hand, however, it is unlike any other international treaty in that it sets up institutions which, as in the case of the ECB, subtract some national sovereignty from individual member states. In that sense, the Maastricht Treaty can be regarded as constitutional law. Changes in the Maastricht Treaty involve a complex co-ordination of all member states' governments and parliaments, which require unanimity and hence are very difficult to achieve."

To avoid scenarios such as the ones described above, or indeed, for the ECB 's policies to be successful, the ECB needs to have the support of the member states: not only the support of governments, but also the support of the people (since it is effectively the people who put governments in power). In order to achieve this, the ECB should keep in mind that different member states have different economic structures and that, therefore, its policies may have asymmetric effects. Many experts worry that the ECB' s stance may be too strict to be politically acceptable in less benign economic circumstances. Most likely, some of the more peripheral countries will remain relatively more inflation-prone than the core countries and ECB policy may need to loosen up in order to help contain inflationary pressure in these more inflation-prone Member States." Also, implementing the same interest rate level in all Member States may not be the best policy, since different countries have different growth rates.

5: Effects on National Central Banks

On December 3, 1998, all NCBs in the EMU Member States simultaneously cut interest rates. This took economists by surprise; no one had expected rates to be cut before the ECB take-over on January 1, 1999. Some argue that this was orchestrated by the ECB, that it was made possible by the commitment of all European governments to the Stability and Growth Pact, and that it proved that national bankers are abandoning regional concerns in favour of what is best for Europe as a whole." Another explanation is that the action was designed to take the pressure off the ECB to cut rates at its first meeting in January. Many economists feared that recent political pressure for lower rates would cause the ECB to delay rate cuts even if they were justified, merely to prove its independence. This way, the ECB could have more time in which to establish its credentials. A final, more cynical, explanation is that national central banks could not resist one last fling before losing their power.11

However, NCBs will not disappear, although their autonomous powers have been severely limited by the creation of the ECB. They are now an integral part of the ESCB and must therefore act in accordance with the guidelines and instructions of the ECB. Again, their primary objective must be price stability. If they do not follow the guidelines of the ECB, the Governing Council shall "take necessary steps to ensure compliance" (Article 14.3 of the Statute). National legislation must be in accordance with the Treaty and the Statute; for example, the Statute sets the term of NCB governors at five years.

NCBs do retain some powers though: they will continue to be active in their own areas, such as distribution of credit, allocation of resources and management of payment systems. They are also allowed to perform other functions, not specified in the Statute, under the condition that they do not interfere with the objectives and tasks of the ESCB. Such functions shall be performed with the responsibility and liability of NCBs and shall not be regarded as being part of the functions of the ESCB. Furthermore, subject to the ECB' s approval, NCBs may participate in international monetary institutions.

The Governors of NCBs are members of the Governing Council. It is the Governing Council which formulates Community monetary policy and establishes the necessary guidelines for their implementation (Article 12.1). The Executive Board is responsible for implementing the policy set by the Governing Council. Thus, it might be thought that no problems will arise, since it is the NCB governors themselves who set the policies which they then have to follow. However this conclusion is somewhat naïve.

Different NCBs are bound to have different opinions regarding the formulation of monetary policy and coordinating them will not be an easy task. Eleven of the seventeen members of the Governing Council represent NCBs. Some economists worry that such a degree of decentralisation will weaken the ECB. The Governing Council is supposed to set interest rates according to conditions in the Euro area as a whole, but there is a risk that national governors will be unduly influenced by conditions in their home country." Therefore, although each individual NCB does not have the power to set monetary policy in its country, they could, together, have enough influence to hinder the smooth functioning of the ECB, in the event of a disagreement over EMU monetary policy.

6: Accountability and Transparency

The ECB is not a democratically elected institution and it is accountable to no one. Some authors have argued that monetary policy is just like any other instrument of economic policy, such as fiscal policy, and so should be determined entirely by democratically elected representatives. However, such a view implies direct political involvement in monetary policy and this goes against the argument for having an independent central bank. Nevertheless, in every democratic society, monetary policy should ultimately be under the control of democratically elected politicians. One way or another, the central bank must be accountable.

It is important not to confuse independence with isolation or impenetrability. Unfortunately, it seems as though the ECB may be doing just that; it will not publish the inflation forecast central to its monetary policy and the minutes and voting records of its council meetings will remain secret for years afterwards. This arrangement will be a convenient one for the central bankers who dominate the council, but it will be an inconvenient one for anybody else with an interest in how Europe is governed. The ECB argument is that confidentiality will protect individuals from pressure to vote in line with narrow national interests. But others argue that national interests may actually become more influential if votes are kept secret, because secrecy makes it easier for board members to vote with local interests, rather than Euro-wide ones.21

The Statute does put some pressure on the ECB to make its decisions available to the public: the ECB shall draw up and publish public reports on the activities Of the ESCB at least quarterly (Article 15.1); a consolidated financial statement of the ESCB shall be published weekly (Article 15:2); and, according to Article 109b(3)of the Treaty, the ECB shall address an annual report on activities of the ESCB and on the monetary policies of the previous and current year to the European Parliament, the Council, the Commission, and the European Council (Article 15. 3). However, as stated above, the proceedings of the meetings will remain confidential, although the Governing Council may decide to make the outcome of its deliberations public (Article 10.4). Furthermore, Mr. Duisenberg intends to present himself periodically for scrutiny by the European Parliament, but he has resisted, as too time-consuming, suggestions that he appear regularly before national parliaments. However there measures are hardly sufficient to make the ECB suitably accountable for its decisions and actions.

As has been argued above, the ECB needs public support for its policies in order to be successful. Macroeconomic policy works by affecting people's behaviour, and the perception people have of the credibility of announced policies will affect the macroeconomic outcomes. Eijfinger and De Haan argue that a central bank which continuously conducts policy that lacks broad political support will sooner or later be overridden." Furthermore, if there is no attempt to build public support for the ECB's policies, it could become an easy scapegoat for politicians when things go wrong.

In order to achieve this public support, and to assure markets and the public that members of the ECB are operating in the interest of "Euro-land" as a whole, the ECB must be transparent. Therefore, the views expressed and votes made by individual council members should be published as soon as possible after they are made. Both British and American experiences have shown that immediate publication of decisions and lagged publication of the minutes of council meetings help boost central bank credibility."

7: Conclusions

It has long been the belief among economists that having an independent central bank controlling monetary policy will lead to higher credibility, lower inflation, and increased growth. However, recent studies have shown that this is not necessarily the case. Whether or not it is beneficial to have an independent central bank is very hard to measure, since the concept of independence has not been sufficiently well defined. Different studies have used different parameters, and have therefore obtained different results.

Furthermore, it is important to notice that existing studies have examined national central banks, and their relation to and effects on the national government and the national economy. Introducing a supranational institution such as the ECB is bound to have different consequences and different considerations must be taken into account. The ECB sets monetary policy for the whole Euro-area, which is made up of eleven countries. These countries are still in charge of setting their own fiscal policies and, moreover, their national central banks retain some powers over, for example, the distribution of credit, allocation of resources and management of payment systems.

This system makes for a rather confusing division of powers and is likely to lead to conflict between the ECB and member states. When setting monetary policy for the Euro-area, the ECB must take into consideration different economic conditions in member states and be aware of the fact that one policy can have very different effects in different countries. Thus, it is likely that NCB governors, who make up more than two thirds of the Governing Council, will want to create a monetary policy which will benefit their home country, without considering the rest of the member states. It may not be so easy to transform national policy makers into European citizens who are equally concerned about the whole of Euro-land.

In order to make the differences in economic structure that exist between member states as small as possible, their economic policies are coordinated by the ECOFIN Council. Each year, the Council draws up and adopts broad economic policy guidelines, such as common objectives for inflation, public finances and exchange-rate stability. This is done in order to minimise the discrepancies between different member states of the effects of the ECB's monetary policy.

However, the most important condition for monetary policy to be successful is that the governments and people of member states support the policies set by the ECB. The ECB has no political counterpart to balance its monetary power and this is considered by many to be undemocratic. Thus, since the decision-makers of the ECB are not democratically elected, it can be very convenient for national politicians to blame the ECB when things go wrong. Many people are already in the habit of blaming Brussels in general and EMU in particular for domestic problems. This phenomenon does not make it easy to properly implement monetary policy and achieve the desired effects.

In order for governments and people to support the ECB, they must be confident that the decision-makers are acting in the interest of the whole Euro-area, and that they are independent, that is, immune from any political pressures from any individual member state. The best way to show the interests of the ECB is to make their decision-processes transparent and available to the public. This has not been achieved today. Instead, the ECB plans to keep confidential the inflation forecast central to its monetary policy and also the minutes and voting records of its council meetings.

In contrast, the ECB has been very anxious to manifest its independence. As a consequence, the ECB is likely to tighten its policy more than would otherwise have been necessary, and policy suggestions raised by national governments may be ignored, even if the ECB would be wise to listen to them. Monetary policy works best if firms, households and financial markets understand exactly what the central bank is doing. A mixture of discretion and secrecy makes for a dangerous cocktail.

The creation of the EMU and one central bank responsible for monetary policy in an area consisting of countries with very different economic structures is an ambitious grand experiment. It has begun in very good circumstances, with European economies getting stronger and international markets receiving the Euro with optimism. However, it remains to be seen how the ECB will choose to set its monetary policies, and what effects they will have on the member states. The experiment has just begun.



Anette Konar graduated from the University of Lund, Sweden, as a Master of Law and is currently pursuing a MA in International Economics and International Relations at The Johns Hopkins University SAIS.