Prof Robert Elgie's Inaugural Lecture

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

2. Supporters and critics of the ECB

As I mentioned before, there is a debate as to whether or not the ECB is an accountable institution. In this lecture, the aim is not to judge whether the Bank's position is 'correct' or whether its critics are 'right'. Instead, the aim is simply to demonstrate how principal-agent theory can be used to defend the positions of those on each side of the debate.

i.) The supporters of the ECB
The ECB believes that the Bank is a democratic and accountable institution. Its members argue that the ECB was delegated the sole authority to conduct monetary policy as outlined in the Maastricht Treaty. The Treaty was adopted democratically. Thus, its members argue, the Bank does not suffer from a democratic deficit. The logic behind this argument can be justified as follows.

The ECB argues that member-state governments delegated power to an autonomous institution. In other words, an independent ECB was the express wish of EU governments and, by extension, EU citizens as a whole. Here, therefore, anything that the ECB does, at least within the confines of the Maastricht/Amsterdam treaties, can be considered democratic. In other words, even if politicians now criticise the Bank for not lowering interest rates, the Bank is perfectly justified in not responding to these criticisms. It is not being unaccountable when it does so. To put it another way, the citizens of EU member-states gave the ECB a blank cheque to act autonomously. The Bank cannot be criticised, therefore, for jealously guarding this autonomy and maintaining its independence. In principal-agent terms, the ECB is not diverging from the preferences of the principal as expressed at the time of the delegation. In short, the employee is still doing what the employer initially wanted.

ii.) The critics of the ECB
The critics of the ECB reverse the logic of the previous argument. They argue that the ECB is guilty of not doing what elected politicians want. As such, it suffers from a democratic deficit. This line of argument can be justified in the following way.

Since the introduction of the third stage of EMU on 1 January 1999, representatives of the Bank have repeatedly stressed that their fundamental concern is price stability. However, while the Maastricht Treaty does indeed state that this is the ECB's primary objective, the Bank also has a secondary objective, namely to support the general economic policies in the Community. These include promoting the balanced and sustainable development of economic activities, and a high level of employment and social protection. Thus, the Bank may be considered to have acted in an undemocratic manner, if can be shown to have ignored, or at least paid insufficient attention to its second objective. This type of reasoning clearly runs counter the ECB's position. It does not question the terms of Maastricht Treaty and, hence, the legitimacy of the initial delegation of power. Instead, it argues that since power was delegated the ECB has failed to take full account of its obligations. Therefore, it can be deemed to have acted undemocratically. In principal-agent terms, the Bank has gone against the initial preferences of the principal by not taking full account of its secondary objective. In other words, the employee is no longer doing what the employer wants.

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