Central Banking: Transparency and Accountability

Transparency and Accountability

Nicolas Jabko

(From: Central Banks in the Age of the Euro: Europeanization, Convergence, and Power, Oxford University Press, 2009)


Quote:
"The delegation of important policy-making powers to unelected central bankers raises serious concerns about the compatibility between central bank independence and democratic ideals."


In the contemporary discourse of financial and monetary officials across the world, ‘transparency and accountability’ are usually lumped together as paired requirements. The spread of this global ethos is puzzling if we consider that central bankers not long ago derived pride and authority from their power to make important decisions outside the public eye. In 1986, Marvin Goodfriend, a vice-president of the Federal Reserve Bank of Richmond, acknowledged—and questioned—central bankers’ adherence to a ‘mystique’ of secrecy surrounding monetary policy (Goodfriend 1986). By contrast, transparency and accountability now seem to be the object of a global consensus about modernity in central banking. Reflecting on his experience as vice-chair of the US Federal Reserve, Alan Blinder comments at great length upon the shift toward more transparency as one of three key elements of a ‘quiet revolution’ in central banking (Blinder 2004: 2–3, 5–33). The question therefore is how can we account for this apparently complete turnaround in less than two decades?

This chapter envisions the emergence of transparency and accountability as the normative embodiment of a historically contingent balance of power between central bankers and other actors. It argues that conventional accounts in terms of economic benefits and of democratic concerns are insufficient. Beyond the apparent convergence on a new global consensus, the equilibrium point of the balance of power between central bankers and other actors varies considerably across political systems. Even though everyone agrees on the need for ‘transparency and accountability’, there remain many different ways for central banks to live up to this global ethos. After developing a critique of conventional explanations, the chapter demonstrates the argument in the cases of the world’s two most important central banks today—the Federal Reserve and the European Central Bank.

Transparency and Accountability in Historical–Political Perspective

At the most common-sense level, a central bank that lives up to the norm of transparency is one that makes its decisions in the public eye and renounces the ‘mystique’ of secrecy. This is the case if central bankers communicate abundant and timely information about their decisions and about the process that leads them to make these decisions. A common-sense definition of accountability is arguably somewhat more demanding. A central bank can be called accountable if it can be held to account for its decisions—both in the sense of explaining its decisions and in the sense of taking responsibility for its decisions. This, in turn, requires a constituency or even perhaps a political body to which the central bank must be brought to account.

Although these two basic definitions are widely open to discussion, a variety of techniques that purport to enhance central bank transparency and accountability have spread across the world since the 1980s. The most commonly cited transparency enhancements are the dissemination of inputs to the monetary policy process (including inflation and other economic forecasts and models that central bankers use as information for making policy); the publication of data about the process and output of monetary policy (minutes of monetary policy meetings, voting records, press conferences, and other central bank statements about policy trends). The most commonly cited accountability enhancements—in addition to the above—are the holding of regular parliamentary hearings of central bankers, the holding of increasingly open appointment (or re-appointment) procedures for central bankers, and more generally the existence of a regular debate and interaction between central bankers and various outside constituencies.

The value that is generally ascribed to transparency and accountability in central banking rests on two conventional rationales—one economic and one political. The economic rationale puts great emphasis on the need for transparency in order to achieve economic policy goals. According to this reasoning, both real changes in the economy and the evolution of economists’ thinking call for enhanced central bank transparency.1 As financial markets became more global and instantaneously responsive, monetary policy has become the central avenue not only for ensuring price stability, but also for macroeconomic demand management. Interest rates are now the main instrument for economic stabilization. In this new context, the expectations of market actors and the credibility of monetary policy become increasingly important. Central bankers need the cooperation of market actors in order to set medium- and long-term interest rates. This in turn would explain the new emphasis on transparency and the increasing importance of ‘how central bankers talk’ (Blinder et al. 2002). Transparency is part and parcel of the public relations strategies that central bankers develop in order to communicate their intentions to market actors.

The political rationale for the new consensus seems to stem from the global trend of increasingly independent central banks.2 Accountability, in particular, is a normative requirement in a democratic context. As one central banker put it, ‘independence and accountability are two sides of the same coin’ (Issing 1999: 505)—or, this is the way things should be from a normative democratic perspective. The delegation of important policy-making powers to unelected central bankers raises serious concerns about the compatibility between central bank independence and democratic ideals. Some scholars have echoed these concerns and have questioned whether independent central bankers can truly be held accountable for their decisions [Berman and McNamara 1999; Cerny 1999; Pauly 1997; for a rather harsh view from a (British) central bank insider, see Buiter 1999]. The resonance of such arguments in a democratic context helps explain, in turn, the insistence of politicians on the norm of accountability and the willingness of central bankers and financial officials to adopt it—at least in rhetoric.

Does this conjunction of powerful economic and political rationales mean that there is now a strong consensus on the need for transparency and accountability in modern central banking? The problem with this view is that there are good political reasons to question the strength of the consensus.

How Central Banks Relate to Their Political Systems

Even though everyone pays lip service to transparency and accountability, different actors push for different versions of the new mantra. In order to see this, it is important to understand that the concept of central bank transparency has several meanings and therefore can easily become an object of contestation among the actors (Begg 2007). Central bankers may generally welcome increased opportunities for communicating their views to outsiders, but they are likely to resist when politicians desire to scrutinize (and potentially criticize) their decisions. In the case of accountability, the problem is even worse because accountability is perhaps the single most important argument that critics have levelled against what they see as the excessive independence of central bankers (see for example Berman and McNamara 1999).

Practical disagreements are compounded by the notorious difficulty of envisioning meaningful accountability from a theoretical perspective—a fortiori in the absence of meaningful electoral sanctions.3 Therefore, scholars’ sharp disagreements on the awarding of accountability credentials to central bankers are perhaps not surprising.4 Although everybody agrees that central bankers should not be left ‘unaccountable’, there is no normatively neutral definition of accountability.

Once we envision ‘transparency and accountability’ no longer as a monolithic ideal but as a field of contest, it makes little sense to continue the largely elusive search for a universally applicable definition or check-list of transparency and accountability mechanisms. Across the world, apparently similar measures (e.g. the definition of a policy targets, or the practice of parliamentary hearings) are being introduced for markedly different reasons, following different modalities, and with different effects. This in turn helps understand the sharp disagreements on the definition and measuring of central bank transparency and accountability. Rather than assuming a homogeneous economic and democratic push for transparency and accountability, the crucial task then is to assess different distributions of resource endowments among actors, and their effects on various patterns of central bank transparency and accountability.

Just as in other movements of modernization in history, the possibility of retaining one’s differences contributes to explain the attraction and diffusion of the global model. Each local elite can embrace economic modernity without however renouncing its distinctive political system and culture. Transparency and accountability become part and parcel of a broader set of trends—financial deregulation, central bank independence, the increasing importance of ratings, and new public management techniques of all kinds—that appear to diffuse on a worldwide scale under the broad label of ‘neoliberal reforms’. While some of these shifts have massive consequences for the evolution of the world economy, considerable variation remains possible within a broader-than-expected spectrum of possible outcomes. Actors thus do not simply follow the example set by the United States or the IMF—let alone New Zealand or Sweden. More often than not, they appropriate terms that have gained global currency for their own idiosyncratic purposes.

Three Sources of Variation in Transparency and Accountability

Three institutional factors stand out as critical sources of variation in central bank practices between the United States and the EU. These factors usually encapsulate not only well-entrenched formal characteristics of the political–administrative system but also culturally accepted, informal ways of doing things that actors rarely question in normal circumstances.5

The first, and perhaps most obvious, factor is the solidity of the central bank’s claim to independence. If the central bank’s claim to independence is (virtually) uncontested, central bankers will be better able to resist what they feel are overly intrusive forms of transparency and accountability. That is the case, for example, in the United States, where the Fed’s record of independent and largely successful monetary policy —with the exception of the 1970s— protects it against fundamental outside challenges. The European Central Bank is a situation similar to the Fed, albeit for different reasons. Its independence is entrenched because of the aura of its German predecessor and model, and also and above all because of the sheer difficulty of challenging its treaty-defined statute. The more their claim to independence is institutionally entrenched, the better central bankers will be able to resist forms of transparency and accountability that might encroach on their independence.

A second factor in explaining variation in transparency and accountability practices is the power of the legislature to oversee the central bank. Interestingly, the principle of legislative oversight is no longer really contested anywhere. Even when central bankers are independent from the executive branch of government, it is now generally accepted practice that they must publicly report on what they do to the legislative branch. But there remains considerable variation in oversight power. The US Congress’s claim to oversee the Fed is virtually uncontested due to its power and prestige within the American system of government. As for the European Parliament, it started from a particularly weak position within the EU and had to work hard to assert a relatively modest claim to oversee the ECB.

The third factor that fosters variation is the capacity of the executive branch to assert policy leadership in relation to the central bank. Monetary policy operates in a broader context of economic policies that remain, for the most part, executive prerogatives. In the United States, the executive claim to economic policy leadership stems from the President’s democratic mandate to implement the policies for which he has been elected, notwithstanding the important powers of the US Congress in fiscal matters. Executive power at the EU level is neither unified, nor a straightforward expression of democratic will.

The Euro Group—which brings together the finance ministers of the countries that have adopted the euro—would be the most likely candidate for policy leadership on fiscal matters. Yet, it is far from a cohesive body of government and is therefore largely unable, at this point, to exert genuine policy leadership. Although each of the above three factors provides only a partial picture of the institutional context within which the central bank operates, they interact to produce rather different equilibrium points for transparency and accountability practices in the United States and in the EU. The nature of central bank transparency and accountability practices ultimately depends less on the presence or absence of specific transparency and accountability provisions than on local institutional dynamics.

The United States: A Strong Bank in the Midst of Divided Powers

As the Fed acquired growing clout in the determination of US economic policies since the 1970s, it has also become more forthcoming about its decision-making process. Against a backdrop of relative stability in the Fed’s legal and political environment, Woolley’s chapter in this volume highlights ‘considerable change with respects to issues of disclosure and transparency’.6 Perhaps the most obvious and internationally replicated change was the introduction in 1975 of regular and increasingly publicized hearings of Fed officials in Congress. But there were many other changes as well: the publication of forecasts starting in 1979; the introduction of the Beige Book about regional economic conditions in 1983; the publication of minutes of Federal Open Market Committee (FOMC) meetings after 1994; and, most recently, Ben Bernanke’s pledge to publish ‘enhanced projections’ by FOMC members about key economic aggregates (Bernanke 2007d). At the same time, the United States is relatively late in adopting certain measures that have become accepted practice in many other states and that can be described as transparency- enhancing, like inflation targeting. The question is what factors provoked these various moves and what is pushing the United States to adopt its own, relatively singular version of transparency and accountability. When we examine this question, the evolving political environment of the Fed looms large in comparison to strictly economic or democratic concerns.

The Fed’s Rise to Prominence and the Mounting Pressures for Transparency and Accountability

The 1970s were years of turmoil for the Federal Reserve as well as for successive administrations. As the US economy ran into double-digit inflation figures, politicians in Congress increasingly questioned the executive branch’s economic policies, including the Fed’s. Of course, the Federal Reserve exists by virtue of an act of Congress, the Federal Reserve Act of 1913. As former Fed chairman Paul Volcker famously put it, ‘Congress has made us, Congress can unmake us.’ The Senate also has the power to confirm or invalidate the president’s appointments of the Fed’s governors and chair. Yet, during the first few decades of the Fed’s history, Congress deferred to the administration in matters of economic policies and the Fed had trouble asserting its independence. 7 Until the 1970s the Fed’s accountability was mostly vis-a`-vis the administration and the Department of Treasury—and thus outside the reach of Congress.

In fact, the first steps toward the present framework of Fed’s transparency and accountability stemmed from Congressional efforts to clip the wings of the executive in matters of monetary policy. After a long period of ‘imperial’ presidency, the 1970s saw a reassertion of Congressional oversight over the Federal Reserve as well as other executive agencies. Only in the mid-1970s did Congress start a practice of regular hearings of Federal Reserve Board officials, in addition to the normal appointment hearings at the Senate. The Federal Reserve Reform Act (1977) and the Full Employment and Balanced Growth (Humphrey-Hawkins) Act (1978) reasserted Congress’s oversight role and redefined the Fed’s mandate. Inflation projections, for example, stemmed from the Fed’s obligation to publish its ‘prospects for the future’. Court cases also played a role in prompting the Fed to become more open, especially the Merrill versus Federal Open Market Committee ruling by the US Supreme Court (following a lawsuit under the Freedom of Information Act), which limited the Fed’s latitude in withdrawing information from the public eye (Goodfriend 1986). By the time Paul Volcker was appointed Fed chairman in 1979, then, the Fed was already subject to unprecedented amounts of public criticisms.

Under Paul Volcker (1979–87), the Fed grew its own wings, which created a new kind of transparency and accountability problem. Volcker asserted the Fed’s claim to independence more forcefully than ever before. Breaking with the relatively accommodating monetary policy of the 1970s, he inaugurated a policy of high interest rates designed to kill inflation. As Volcker established the Fed as a Washington power broker, however, he also faced a barrage of critics.

The Fed’s harsh medicine of high interest rates was blamed for the recession of the first Reagan Presidency, and pamphlets against the Fed and its lack of accountability proliferated. Secrets of the Temple, a best-selling book by journalist William Greider (1987), expressed the American Left’s widespread suspicion that the ‘independent’ Fed actually catered for the special interests of Wall Street rather than for those of the general population. Despite all the criticisms, Paul Volcker’s Fed was above all widely credited with its successful victory over the inflationary pressures of the 1970s. Yet, the Federal Reserve’s aloof and secretive culture was its Achilles’ heel. More important change was brewing on both sides of the aisle in Congress and within the Federal Reserve Board itself.

After Alan Greenspan took over as chair, the Fed adopted a less confrontational approach but, if anything, gained voice and influence in the US economic policy-making process—which seemed to magnify the transparency and accountability problem. Greenspan’s advocacy of fiscal prudence was clearly a central consideration in the Clinton administration’s decision to adopt a programme ofdeficit reduction in the 1990s. Some members of the Clinton administration resented this rapid rise to power of a Republican appointee.8 As the US economy boomed in the late 1990s, Greenspan became the character depicted in a biography by Bob Woodward (1997) as the ‘Maestro’. He was universally hailed as the chief architect of an economic policy that ensured both low inflation and remarkably robust growth, along with dwindling federal deficits. It is easy to overstate the Fed’s claim to exert policy leadership, however. In law but also in practice, the Fed is not only ‘subject to the oversight of the US Congress’ but also ‘must work within the overall objectives of economic and financial policies established by the government’ (Board of Governors of the Federal Reserve 2005: 3). Of course, the administration’s prevalence over the Fed declined after the 1970s and the Fed was never as deferential to the administration as under Roosevelt. Yet the President retained the power of appointment, which implies a form of central bank accountability to the President—especially given the fact that the Fed chair can be reappointed. Even under Clinton, Greenspan’s seemingly huge influence over government policies was probably the product of a good cooperation between the Fed and the administration, rather than of an undue power grab by the Fed. Above all, Greenspan was able to develop a good working relationship with Clinton and his long-time Treasury Secretary Robert Rubin. Clinton chose to reappoint Greenspan—and he would presumably have acted differently if Greenspan had not been a good ‘team player’ (Woodward 1997: 159–60). The administration’s claim to policy leadership was reasserted with a vengeance by the post–2000 Bush administration, when Greenspan endorsed the president’s tax cuts despite mounting fiscal deficits.

Once again, therefore, the key factor that pushed the Fed to change its approach to transparency and accountability was really the renewed pressure coming from a powerful Congress—a structural characteristic of the US political system. In the early 1990s, Congress was demanding more transparency and accountability as a prerequisite to approval of the administration’s funding of international organizations. In that context, the Fed and some other federal agencies fell under the same Congressional axe. The single most important consequence was the 1994 decision to publish minutes of the FOMC meetings. The consequences of this decision are actually ambiguous. According to Meade and Stasavage (2008), it may have rigidified the style of FOMC debates, as participants apparently began to voice their opinions less freely. Critics would add that the publication of minutes is a rather limited form of accountability, especially since the minutes are edited and were revealed only many weeks after the decision. (The delay was shortened to three weeks in 2005.) All this may be true, but it was nonetheless a departure from existing practice.

Increasingly, and perhaps surprisingly, voices from within the Federal Reserve System were heard supporting the push for greater transparency and acc0ountability. The central bankers were above all concerned not so much about their own accountability, but about the benefits of explaining monetary policy decisions to the markets.9 But they also knew there was an outside demand for more transparency and accountability. Most vocal among them in the 1990s was vice-chair Alan Blinder, a Clinton appointee to the Federal Reserve Board.10
Blinder’s reasoning was political as well as economic, since he believed that both the Fed’s democratic credentials and its credibility would be best served by enhanced transparency and accountability. Originally a product of distinctively American political pressure coming from the US Congress, the Fed’s conversion to transparency and accountability was now complete—or was it?

The Debate Over Inflation Targeting and the Problem of the Dual Mandate

Let us examine the substance of the Fed’s transparency and accountability. One glaring aspect that seems to be missing in the case of the US Federal Reserve is a clear policy target. There is an interesting political story behind this absence—one that highlights potential contradictions in the new ethos of transparency and accountability. And the resistance to this particular step once again comes from the particular political environment in which the Fed finds itself, namely, as an independent central bank subject to strict legislative oversight from the US Congress.

The first episode of this story about inflation targeting started as a technical debate in central banking and economist circles. After the heyday of monetarism in the early 1980s, central bankers were looking for a policy target that would be both an appropriate intermediate goal for monetary policy and a way to anchor market expectations. Inflation targeting emerged as a potential solution to this problem in New Zealand and Europe. The Bank of New Zealand pioneered the use of numerical inflation targets for monetary policy in the late 1980s. The Maastricht Treaty’s definition of price stability as the ‘primary’ goal of monetary policy in 1992 was a step in the same direction. One of the benefits of this approach was to enhance the transparency of the decision-making process. If there were a clear target that everybody could see, central bank transparency and accountability would be presumably enhanced.

Yet in the United States these international developments toward greater transparency were controversial because of the so-called ‘dual mandate’ of the Fed since the 1978 Humphrey-Hawkins Act. The Fed’s task is not only to fight inflation but also to pursue ‘full employment and balanced growth’ at the same time. On the one hand, the Fed’s defence of its growth-enhancement mandate is often largely a matter of rhetoric. There were times when the Fed acted as a very hawkish inflation fighter—especially under Paul Volcker in the 1980s. The Fed could argue that it was impossible to make progress on all fronts at the same time, and thus arguably obfuscate its mandate (e.g. Wyplosz 2001: 5). On the other hand, the dual mandate also means that the governors are legally bound to worry about growth as much as about inflation. In the Fed’s recent history, ‘doves’ who argued that growth should not be sacrificed to the fight against inflation have been able to invoke the dual mandate in support of the argument.11 From this perspective, the dual mandate may be argued to ensure that central bankers are held accountable for the goals set for them by Congress.

The US debate on inflation targeting quickly became partisan. On the Republican side of the aisle, Congressmen Coney Mack and Jim Saxton argued that the Fed should have a single hierarchical mandate of price stability, meaning zero inflation. They favoured not only inflation targeting but a change in the mandate of the Fed. Others, especially among Democrats, argued that the mandate should not be changed and the Fed should stay away from inflation targeting. They feared that an inflation target would assign more weight to the price stability mandate of the Fed and would authorize the Fed to disregard its employment mandate. After some hesitations, Greenspan sided with the second camp in the name of flexibility, and the Mack-Saxton proposal went nowhere in the 1990s.

The next episode of this inflation-targeting saga started when Ben Bernanke was appointed chair of the Fed in 2006 and is still being played out. Bernanke came in with a reputation as an advocate of inflation targeting and started defending a move of the Fed in that direction, in the name not only of policy effectiveness but also of transparency and accountability. The lines of debate among economists had changed, since inflation targeting is no longer a rallying cry for inflation ‘hawks’. Many supporters of the dual mandate in US central banking circles now support ‘flexible’ inflation targeting via a small but definitely positive inflation target, especially Alan Blinder and Janet Yellen (see Meyer 2004: 40–3). But the topic remains politically sensitive. In Congressional hearings, Bernanke pledged that any adoption of an inflation target would be progressive and would not require a change in the mandate. The Fed’s new communication strategy, unveiled by Bernanke (2007d), introduces an extended inflation forecast (with a time horizon of three years instead of two) and additional information about the FOMC members’ views about the economy. Yet Bernanke stopped short of introducing a formal inflation target:
‘My colleagues and I strongly support the dual mandate and the equal weighting of objectives that it implies.’

This inflation-targeting debate illustrates the importance of Congress in steering the Fed toward a particular model of transparency and accountability. For Congress, accountability is not just a concern in and of itself. It is also a way to assert legislative oversight, to acquire a role in the policy debate, and to defend its turf against the administration and the Fed. To this day, the Fed’s mandate remains the dual, non-hierarchical mandate set by Congress in the 1970s, and hard inflation targets are eschewed. No matter how successful its policies and how powerful its voice in US economic policies, the Fed could not afford to ignore the argument against inflation targeting—since it came from Congress. Thus, abstract considerations of efficiency or democracy were clearly secondary to the institutional framework of central banking in the United States. The same was true in Europe, but there the institutional dynamics were remarkably different.

The European Union: A Strong Bank in a (Still) Weak Polity

Central bank transparency and accountability were not paramount concerns in the late 1980s and early 1990s, when European political leaders designed the European Central Bank (ECB) as an independent central bank to manage the new European currency. According to an extensive investigation of this process, Europe’s economic and monetary union embodied ‘the triumph of technocratic elitism over the idea of political democracy’ (Dyson and Featherstone 1999: 801). Yet after the ECB started to operate in 1998, its officials quickly pledged to make the ECB ‘the most transparent and accountable central bank in the world’ (Issing 1999: 105; see also Padoa-Schioppa 2000: 28). The ECB has therefore developed its own model of transparency and accountability. This model is characterized by extensive but often unilateral communication. The ECB was the first major central bank to systematically hold press conferences after the meetings of its Governing Council. Compared with the Federal Reserve, the ECB has a relatively clear inflation objective, and Executive Board members also appear before the European Parliament. Yet, the ECB does not publish a Beige Book, nor the minutes or the voting patterns of its Governing Council meetings. Let us now turn to the factors that shaped the development of this model.

The ECB’s Problem of ‘Institutional Loneliness’

On the face of it, the ECB did not really need to go in the direction of transparency and accountability. The primary purpose of the Treaty of Maastricht was to create a single European currency under the supervision of an independent central bank, not to enhance democracy. Central bank independence was granted quasi-constitutional value, whereas the Maastricht Treaty’s formal transparency and accountability provisions were scarce. Treaties are the functional equivalent of constitutional documents for the EU, and it requires a unanimous agreement between the member states to change them. Because the ECB is a Treaty creature, it is particularly entrenched. And yet the ECB is part of an EU political system that still lacks the historically produced power and legitimacy of its constituent member states. This situation is, in a sense, the exact opposite of the situation in the United States, where the Federal Reserve is a venerable century-old institution, yet has no constitutional status whatsoever. As a consequence, EU central bankers could not completely ignore widespread concerns about the EU’s ‘democratic deficit’. After the harsh criticisms against the Maastricht process, the young ECB needed to restore its democratic image. As soon as it was established, the ECB started a practice of numerous press conferences and outreach, by which it attempted to communicate its policies to the markets, to the general European public, and to other political bodies. Not only the ECB’s monetary policy decisions but also many key announcements of monetary policy strategy are announced by way of press conferences and speeches. In addition to this all-out communication strategy, the ECB also endeavoured to break out of what one ECB Board member called its ‘institutional loneliness’ (Padoa-Schioppa 2000: 37). Despite its initial reluctance to engage in ‘politics’, the ECB increasingly looked for partners to break its isolation and to enter into a normal dialogue with other bodies.

This eagerness of Europe’s central bankers to restore their democratic image was met favourably by some other actors. In particular, the European Parliament saw it as an opportunity to develop for itself something akin to the oversight function of the US Congress over the Federal Reserve, which members of Parliament cited as a constant reference in parliamentary discourse about the (desirable) ‘democratic accountability’ of the ECB. At the end of 2000, the ECB acknowledged that the European Parliament is the only body ‘directly elected by the European citizens and, consequently, plays a crucial role—the ECB must be accountable to the Parliament for the conduct of monetary policy. ( . . . .) In this sense, the relations between the ECB and the European Parliament must be considered as more than a simple statutory requirement’ (European Central Bank 2000: 54). Early on, therefore, the ECB started a practice of sending Executive Board members to explain monetary policy before the European Parliament (see Jabko 2003).

The sheer force of democratic ideals is insufficient, however, to explain the growing importance of transparency and accountability in the official rhetoric of both the Parliament and the ECB. Since the Maastricht Treaty did not explicitly provide for it, an accountability relationship developed progressively as a practical result of interactions between key actors. By the ECB’s own admission, the hearings ‘contribute to safeguard the independent status of the ECB. Consequently, it is certainly in the ECB’s enlightened interest to carry on with such relations’ (European Central Bank 2000: 54). Thus, the evolution of the ECB’s official position is, for the most part, the result of a calculation. The expected gains in terms of consolidated independence are perceived as far higher than the expected costs of acknowledging the European Parliament’s role as a privileged interlocutor.

In the absence of strong parliamentary powers at the EU level, the ‘dialogue’ is in fact not very constraining. A new routine of quarterly hearings of the president of the ECB before the European Parliament’s Economic and Monetary Affairs Committee has been established. The main actors looked at foreign models as sources of ideas, especially the US model. Yet despite the recurrent reference to the Fed’s accountability to the US Congress, the staging of ECB hearings is revealingly different from the hearings of the chair of the US Federal Reserve by Congressional committees. Whereas the chair of the Federal Reserve stands in the witness box and must answer questions asked by a small number of Congressmen who sit above him like judges, the president of the ECB addresses a floor of European Parliament members from a platform where he is seated next to the chair of the Economic and Monetary Affairs Committee. Moreover, the ECB president’s hearings only last two hours, and members of Parliament are only allowed to ask the President two questions, which he can therefore dodge quite easily. Here again, the difference with the US situation is striking, since the chair of the Federal Reserve is subjected to a barrage of questions from Congressmen.

In sum, the ECB and the European Parliament came to an agreement on the rules of the accountability game because both bodies had a clear interest in playing that game. Accountability became a terrain of political contest between two bodies that defended what they had identified as their primary interests. The ECB wanted more democratic legitimacy, which it could acquire through good relations with the European Parliament. Conversely, the European Parliament desired a greater say on the conduct of economic policy within the EU, which it could gain from its relations with the ECB. Thus, in many respects, the ‘dialogue’ between central bankers and members of the European Parliament developed into a form of exchange.

The real question is whether the game of central bank accountability between the ECB and the European Parliament really serves democracy, or merely the interests of the various actors who play that game. It is important to realize that both hypotheses could well be valid at the same time. The evolving debate on central bank accountability represents an interesting attempt to ‘muddle through’ a new democratic practice, yet it is also, and perhaps inevitably, a power play between the main actors—just as in the United States. Despite the continuous upgrade of its powers since the 1980s, the European Parliament does not in any sense match the power and prestige of the US Congress. The European Parliament gained its oversight role over the ECB only by courtesy of the member states, and, furthermore, this oversight is limited to mere ‘reporting requirements’. This affects the Parliament’s power to hold the ECB accountable. The practice of parliamentary hearings has different parameters and results, despite the superficial similarity between the EU and the United States.

Just as important, there is almost no form of accountability to the executive in Europe—largely because there is no unified executive able to claim policy leadership. Thus far, the Euro Group—that is, the caucus of Euro Area finance ministers within the EU Council—has not asserted very strongly its preferences vis-a`-vis the ECB. This is due to the difficulties of coordinating member governments’ economic policies, as well as to the extent of ECB independence in the Treaty. Only with the nomination of Jean-Claude Juncker as the chair of the Euro Group did this situation begin to change. But the chair has no hierarchical powers over his colleagues, so his room for manoeuvre is limited. By contrast, member states are still vested with so much power and legitimacy that central bankers are very cautious when it comes to accountability toward the member governments. This also explains the relative opaqueness of the ECB when it comes to minutes and voting patterns. In the absence of a truly unified EU-level economic stance, the governors of national central banks refuse to be exposed to the heat of national debates on their positions within the Governing Council.

Limits and Dilemmas of Transparency and Accountability

A good example of the limits and dilemmas of transparency and accountability in the EU is the definition of the ECB’s mandate. The Maastricht Treaty defines ‘price stability’ as the primary objective of the ECB, with other objectives like growth and employment only permissible ‘without prejudice’ to price stability. The effects on accountability depend on the analyst’s definition of accountability.

On the one hand, it could be argued that in practice there is almost no difference of behaviour between the single-mandate ECB and the dual-mandate Federal Reserve. Those who hold this view favour the ECB’s mandate from a transparency and accountability perspective, which has the advantage of being clearly hierarchical. From this perspective, the mandate is transparent, and the ECB is ‘accountable for the fulfilment of its mandate’ (Issing 1999).

On the other hand, it is also possible, and indeed more conventional, to argue in favour of more open-ended goals for policy makers as a way to reinforce their accountability. In political theory, the standard conception of accountability assumes that there is room left for policy makers to exercise discretion, and that the evaluation of policies takes place ex post. The existence of meaningful accountability is then opposed to the definition of a strict mandate (Pitkin 1967). In this conception, therefore, too much transparency can actually come at the cost of accountability.

Second, the self-definition of their role by central bankers is different in the ECB and in the United States. While the Fed is an independent central bank, it has had to live with a particularly broad mandate that includes growth and employment as well as low inflation. In the Euro Area, the situation is very different because the ECB’s mandate is narrower—with price stability defined as a ‘primary objective’. But arguably even more important is the fact that Eurosystem central bankers have come to see a narrow technical definition of their task as a guarantee of their hard-won independence. Unlike their American counterparts, they are in an EU sphere where nobody has sufficient legitimacy to make clear—let alone partisan—policy choices. The consequence is that central bankers attempt to escape political debate and to deny the existence of difficult trade-offs altogether.

Does an inflation rate ‘below 2 per cent’, namely, the ECB’s unilaterally chosen ‘reference value’, strictly correspond to the Treaty’s objective of ‘price stability’? This is debatable—to say the least. In 2003, the ECB chose to specify its objective and announced a target of ‘below but close to 2 per cent’. The first remarkable fact is that, unlike the US situation (or the Japanese situation), there was no unified political body able to really discuss—let alone to disagree— with the ECB on this matter. Despite a formal recognition of the Euro Group and the introduction of a stable chairmanship during the EU Constitutional Convention of 2002–3, the forums toward which the ECB is supposed to be transparent and accountable remain ill designed. If this situation ever changes, it will not be simply because of a universal realization that change is desirable from the viewpoint of transparency and accountability—some very serious political obstacles stand in the way.

In addition, it is possible to question, from a substantive perspective, the ECB’s adherence to a rather rigid conception of central bank independence and its refusal to engage in a debate about its policy target. While understandable in its own terms, given the ECB’s political environment, the absence of substantive debate is not necessarily the way of ensuring satisfactory standards of transparency and accountability.12 After all, the fact that price stability and central bank independence are given such high priority in the Maastricht Treaty must itself be understood as the output of a political process, not simply as a legal translation of economic rationality. In the French referendum of May 2005 on the EU Constitutional Treaty, one of the recurrent arguments of opponents was the ‘democratic deficit’ of the EU and specifically the ‘lack of accountability’ of the ECB. But then, again, there is a gap between a diagnosis of the situation and a political cure.

Concluding Remarks

Everybody today talks about enhancing central bank transparency and accountability, but the fact is that institutional designs to ensure these goals remain quite different. It is not clear that they will deeply converge in the future, since varieties of transparency and accountability have deep roots, and no system can claim to be completely coherent and ideal. To be sure, the frameworks that govern central banking will probably continue to evolve with a view to achieve more effectiveness and more democracy. But, as we saw, efficiency-enhancing transparency and democracy-enhancing accountability sometimes generate different prescriptions for change. Thus, mutual emulation will likely continue, but there is no inherent reason to believe that it will necessarily lead to homogeneity.

In addition, new problems emerge, sometimes very powerfully, and they do not always call for the same remedies. For example, the financial crisis of 2007–8, with its near-collapses of several banks on both sides of the Atlantic, highlighted the need for good prudential supervision as well as good monetary policy. In keeping to the scholarly literature on central bank transparency and accountability, this chapter has given no attention to financial supervision.

Yet if we briefly consider this question, it is obvious that the requirement for good prudential supervision may well involve less transparency on the part of central bankers. This is because transparent decision-making in this area may create moral hazard. If banks and other financial firms know exactly at what point and how quickly central bankers will come to their rescue, they might be tempted to push the envelope and take on excessive risks. Thus, the on-going redeployment of central bankers’ energy toward the task of prudential supervision may also lead to a more sceptical assessment of the requirement for transparency—at least in this area of central bank operations.

More generally, as John Freeman (2002: 904) puts it, ‘consensus with respect to the goals of monetary institution is a false perception.’ This raises the possibility that the widespread support for central bank independence, transparency, accountability, and other holy cows among political economists, actually indicate a ‘crisis of imagination in institutional design’ (ibid. 906).

Trends that look overwhelming for the progress of modernity may actually be much less seamless than they appear at first sight. As long as there is room for incoherence within and deviation from the consensual norms, the façade can nonetheless cover the reality without generating too much cognitive dissonance. Only when we stop believing in the reality of the façade will we need to move to another (consensus) view.


Notes

1. The importance of monetary policy credibility is one way to address the time consistency problem pointed out by Kydland and Prescot (1977). On the importance of transparency to help central banks achieve their policy objectives and buttress their credibility, see Geraats (2002), Stasavage (2003).

2. McNamara (2002) lists 38 countries that have made their central banks independent in the course of the 1990s. Pollilo and Guillen (2005) calculate that more than 80 countries have adopted legal provisions that increase the independence of their central banks; Marcussen (2005) finds roughly similar numbers.

3. Political theorists have typically conceptualized accountability in the context of electoral representation and often concluded that it was difficult to achieve in practice. The addition of power delegation from elected officials to independent central bankers arguably makes accountability even harder to operationalize. See Pitkin (1967), Mansbridge (2003).

4. See for example the heated Buiter–Issing and Elgie–De Haan–Amtbrink debates on the issue of whether or not central banks in Europe had become more accountable in the 1990s: (Buiter 1999; De Haan and Amtenbrink 2000; De Haan and Eijffinger 2000; Elgie 1998, 2001; Issing 1999).

5. These factors can thus be called institutions in an anthropological sense, like ‘planets fixed in the sky’ (Douglas 1986: 46–7).

6. This change contrasts with Woolley’s (1984: 26) earlier assessment that monetary policy was ‘made in great secrecy’.

7. For a narration ofWilliam Cheshire Martin’s role in securing the Fed’s independence not from but ‘within the government’, see Bremner (2005).

8. Labor Secretary Robert Reich (1997) was one of the most outspoken critics of Greenspan’s influence on the administration’s policies.

9. According to Woodward (1997: 114, 226–7), Greenspan favoured transparency also because he thought it magnified his own power. For an early expression of this concern for the benefits of transparency, see Goodfriend (1986).

10. Blinder (2004: 5–33) offers his own account of his advocacy of transparency within the Board of Governors.

11. Meyer (2004) cites a 1996 meeting at which Janet Yellen, a member of the FOMC, boldly challenged Alan Greenspan on this issue.

12. See Stasavage (2003) for an argument that reconciles monetary policy credibility with a degree of democratic accountability, but on the condition that central bank independence ceases to be an absolute principle.