The Eurosystem: Transparent and Accountable

In CEPR Policy Paper No.1, 'Alice in Euroland', Willem Buiter argues that the ECB is not sufficiently open, transparent and accountable, and that its strategies and objectives need clarifying. In CEPR Policy Paper No.2, 'Willem in Euroland', Otmar Issing of the Executive Board of the ECB presents his rebuttal.

Issing argues that observers of the European Central Bank (ECB) often start from an inappropriate premise, in that the perception of many commentators is still heavily coloured by different national frames of reference. In particular, transparency and accountability need to be discussed against the background of the stability-oriented monetary policy strategy that the ECB has actually adopted and not as if it were pursuing some other strategy such as direct inflation targeting.

Issing stresses that from the very outset the ECB has aspired to be among the most transparent and accountable central banks in the world. How to achieve this under the basic institutional set-up of both the Maastricht and Amsterdam Treaties and under the conditions of a multi-country monetary union, however, is not as straightforward a task as is commonly assumed in the public debate. For this purpose it is important to distinguish between accountability and transparency, both of which are crucial for the effectiveness of monetary policy and for the success of European Monetary Union over the longer term.

Transparency can never be complete, according to Issing. Achieving the maximum degree of transparency is not simply a question of making the maximum amount of information available. For more words do not necessarily mean more information, and more information does not necessarily by itself contribute to greater clarity. What matters for transparency is therefore both clarity (the public's need to understand) as well as openness (the public's right to know). From this perspective transparency can best be understood not as an attribute per se, but the degree to which the bank 'says what it does' and 'does what it says'.

The ECB's accountability is based on its clear mandate, in particular by the overriding primary objective to obtain price stability, and by the quantitative definition of price stability that the Eurosystem has since provided. The key channels for accountability are the statutory reporting requirements of the ECB to the European Parliament, the Council of Ministers and the Commission, which take the form of annual and quarterly reports. The President of the ECB presents these reports to, and discusses them in, the relevant committee of the European Parliament, which can also question other members of the ECB's Executive Board. In the interest of further increasing accountability and transparency, and going beyond the requirements of the Treaty, the ECB has decided to publish a monthly Bulletin and to hold a press conference at least once a month.

Buiter had made specific proposals in his paper, which he believed were necessary changes that could be made overnight at the discretion of the ECB's Executive Board. These included an end to the culture of collective responsibility and the publication of an inflation target, an inflation forecast, individual voting records and minutes from the meetings. Issing addresses Buiter’s proposals as follows.

An End to the Culture of Collective Responsibility

A substantial degree of individual accountability within a collective decision-making body would not be desirable in principle nor would it be practically feasible. It may, to a limited extent, be possible in a smaller decision-making body and in the far more favourable circumstances of a single nation state, but expecting it to work for the Eurosystem appears to be highly unrealistic in Issing’s view. Excessive focus on individual personalities, rather than on the institution as a whole, may render the public's signal extraction problem more, not less, difficult. Developing a common culture and speaking a common 'language' for external communication is especially important for a new institution and under the conditions of a multi-country monetary union.

Clarify the Operational Inflation Target

The ECB does not have an operational inflation target. It does not pursue a strategy of direct inflation targeting (or one of pure monetary targeting) and to pretend otherwise would do nothing for transparency. The ECB Governing Council has provided a quantitative definition of price stability, which is the objective it has been assigned by the Maastricht Treaty. This provides a clear basis for accountability and a benchmark against which its performance can, and should, be judged. Its stability-oriented strategy in attaining its objective over the medium term rests on two pillars: a prominent role for money, as reflected in a quantitative reference value for monetary growth, and a broadly based assessment of the outlook for price developments and the risks to price stability.

Publish the Inflation Forecast

In contrast to direct inflation targeting, the ECB strategy does not attempt to condense and present all relevant information through a single inflation forecast. Although inflation forecasts do have a role to play in the ECB's assessment of price development, they are only one element alongside a wide array of indicators. In weighing the case for publishing any form of inflation forecast, their (limited) role within the Eurosystem must be clearly understood. Otherwise, publishing forecasts could be misleading if it leads the public to attach more significance to them than they have in the decision-making process. Furthermore, forecasts are subject to considerable uncertainty, even over relatively short horizons. In the Eurosystem this problem is exacerbated by the uncertainty surrounding the economic environment and the structural changes associated with the transition to stage three of Monetary Union. Issing argues that it is particularly important in the initial phase of the euro's life that inaccurate forecasts do not undermine the credibility, accountability and transparency of monetary policy with respect to its price stability objective. As forecasts become more accurate and as the public become more familiar with the Eurosystem's monetary policy strategy, the arguments against the publication of inflation targets will diminish.

Publish Minutes from the Meetings

At the monthly press conference, held immediately after the Governing Council's meeting, the President of the ECB summarizes and explains the decisions of the Governing Council and the reasoning behind them. Both the President and the Vice-President are available for extensive questioning, transcripts of which are made available on the ECB's website. This practice, in conjunction with the comprehensive information provided by the ECB's Monthly Bulletin, comes very close to providing summary minutes. It combines the requirement of clarity in interacting with the public with an unprecedented degree of instantaneous and direct 'hands-on' accountability, literally within minutes after the meeting. This may well be preferable to publishing 'official' minutes, which are carefully drafted and edited documents that have normally been checked and approved by individual members and are often subject to considerable delay.

Publish Individual Voting Records

Issing argues that the publication of members' voting records would be damaging. It would not be sufficient for substantive individual accountability, which would also require revealing the arguments, assumptions and view of the world underlying individual votes. Few people go as far as advocating the publication of attributed minutes or verbatim transcripts and individual forecasts/models, since the effectiveness and coherence of internal discussions would suffer. Thus the potential benefits of publishing votes are limited, even under the questionable model of individual accountability, while the risk of confusing policy signals is not negligible. Under the conditions of a multi-country monetary union the perception of policy will inevitably continue to be coloured by national frames of reference. The public would focus excessively on the opinions of individual members and it would be impossible for them to demonstrate that their voting behaviour had not been influenced by national considerations.

Returning to the literary framework of the debate, Issing concludes that the perception of reality depends on how one looks at it. According to Issing, Lewis Carroll's 'Alice in Wonderland' makes this point and Willem Buiter's  'Alice in Euroland' demonstrates it. 

CEPR Policy Paper No.1 ‘Alice in Euroland’ by Willem Buiter (University of Cambridge and CEPR).

CEPR Policy Paper No.2 ‘The Eurosystem: Transparent and Accountable or Willem in Euroland’ by Otmar Issing (European Central Bank).

Policy Paper No.1 was launched at a Press Lunch and a Lunchtime Meeting in London in April 1999.