Prof Robert Elgie's Inaugural Lecture

Bringing the People Back In: The European Central Bank and the Democratic Deficit
Professor Robert Elgie

3. The reform of the ECB

It is clear, therefore, that there are arguments to support the position of both the opponents and the critics of the ECB. In this lecture, I am not trying to determine which of the conflicting arguments is 'correct'. Instead, the aim of the rest of this lecture is merely to show how principal-agent theory can also be called upon to indicate ways in which a democratic deficit could be addressed if the critics of the Bank are judged to be right.

Earlier on, I mentioned some of the controls associated with principal-agent theory. Here, I said that the first set of controls comprise ones that are established at the time when an agency is set up. In the case of the ECB, there is little to be done in this regard. The structures of the Bank can only be reformed by a new Treaty and this is unlikely to happen. Moreover, even if member-state governments began to go down this path, the financial and economic repercussions would most likely be substantial as the markets would almost certainly react in a negative fashion. In practical terms, therefore, it would be very difficult to increase the accountability of the ECB without actually undermining the institution's credibility, threatening the stability of the euro even further and squandering any of the potential benefits to be gained from EMU.

By contrast, there is some scope for increasing the ongoing controls to which the Bank is subject. In this regard, the European Parliament (EP) has a key role to play. The EP is well placed to oversee the activity of the ECB because it can do so without the need for Treaty reform. Indeed, to date the EP has been moderately successful in expanding its influence over the Bank in this regard (Westlake, 1998). For example, at the time of his nomination as President, Duisenberg stated that he would be likely to withdraw his candidacy if "there was a wave of unanimous disapproval" (Duisenberg, 1998, p. 19), even though there was no statutory obligation for him to do so. In terms of future changes, the EP should consider debating more frequently the conduct of the ECB's affairs even in the absence of the President or one of his representatives, passing resolutions concerning the Bank's monetary actions, and presenting the public more clearly with its own preoccupations for the conduct of monetary policy.

Another potentially important reform would be for the euro group (the group of euroland Finance Ministers) to play a greater role than is currently the case. Certainly, there is little to be gained by the group provoking a public clash with the ECB so as to try to force the Bank's hand. Such a clash would only be likely to make the ECB more intransigent. Indeed, this was shown very clearly when the former German Finance Minister, Oskar Lafontaine, tried unsuccessfully to change the Bank's policy in the period from January to March 1999. However, the group does have the potential to establish a more subtle dialogue with the ECB. If the group conducts itself in a discrete way, then it has the opportunity to create a favourable and mutually respectful environment within which the ECB may be encouraged to give greater importance to its secondary objective when making its decisions. The best evidence for this point so far can be found in the events surrounding the Bank's first interest rate cut in April 1999 following Lafontaine's resignation. In the press conference after the Bank's decision, Duisenberg was asked whether he had met governments halfway and had agreed to the cut so as to help the unemployment problem. In his reply the President of the ECB stated that he did "not have that much difficulty" with the reporter's words (Duisenberg, 1999b, p. 6). In this way, then, there is the potential for the euro group to instil a heightened awareness of wider economic and social concerns into the ECB's way of thinking without reforming the Maastricht/Amsterdam treaties, without forcing a damaging public dispute between politicians and central bankers and, hence, without threatening the credibility of the ECB and the potential success of the EMU project as a whole.

read on...
1. The basic assumptions of principal-agent theory
2. Supporters and critics of the ECB
3. The reform of the ECB
In Conclusion