Bulgarian National Bank seminar EMU and the New

Bulgarian National Bank seminar EMU and the New Member States – A Year after Accession 3 -4 October 2005 Sofia The Making of the Statute of the ESCB dr Carel van den Berg De Nederlandsche Bank

The Making of the Statute of the ESCB – the role of Independence, Accountability and Transparency Bulgarian National Bank seminar EMU and the New Member States – A Year after Accession 3 -4 October 2005 Sofia dr Carel van den Berg De Nederlandsche Bank 2

Session I: Central Banks’ Independence • “The Making of the Statute of the ESCB and of the ECB – the role of Independence, Accountability and Transparency’’ • Examples and facts based on study of the genesis of the ESCB Statute (1989 -1991) 3

• Definitions: • Independent = not subordinate or subject to nor dependent for support upon another government, person, or thing. • Accountable = being obliged to give a reckoning or explanation of one’s actions; also: responsible. • Transparent: letting through information; also: easy to understand. Webster English dictionary

• Independence, accountability and transparency are interrelated, but most importantly focus at different audiences: • Independence primarily versus ‘Executive’ • Accountability mostly aimed at directly elected bodies (Legislature) • Transparency mostly aimed financial markets • Disclosure and degree of understanding

INDEPENDENCE • Federal Reserve (1913) • Federal Reserve Act: independence not mentioned – de facto it is independent!

• FED’s independence based on: federal character, tenure (14 yr), financial independence; Congress created FED. • task (‘elastic currency’ and better supervision) was considered too complicated for Congress, tho Congress had been given the power to ‘coin money’; Congress will always be suspicious of too much Administration influence; in line with balance of power between Administration and Congress. Stable prices (as part of multiple objective) only mentioned in FRA as of 1977.

EUROPE (seen from 1980 s): • Central banks dependent of Executive • Germany: history of hyperinflation and misuse of Reichsbank • Americans (1945): established a federal central bank system in Germany (Reichsbank dissolved) and explicit institutional independence. • Bundesbank became very successful and role model

• Bundesbank model copied into ESCB with high degree of institutional, personal, functional and financial independence; also supportive its federal character. • ESCB even more independent than Buba: • no suspension, no reappointment, staggered appointments, clearer mandate, Treaty-based.

• WHY ESCB more independent than Bundesbank? Is ESCB not too independent? • Main answer: different political and institutional environment in Europe: lack of tradition of independent CBs, lack of an accountable political and economic counterpart at European level. E. g. who should be able to override the ECB? Ecofin is ‘black box’ in terms of acountability. Need for even stronger independence.

• Independence is never absolute: • Change of the central bank law • Exchange rate policy • Unsound fiscal policy. These areas are outside the Statute, and in a sense very political!

• There is also increasing support from academics for CB independence: Kydland Precott (1977) defined the time-inconsistency problem for central banks with the same preferences as the government; Rogoff (1985): ‘conservative governor’. (Delors Report 1988 -89. ) • (Independent central banks are better able to achieve low inflation at low cost because they are better able to commit than governments. )

• Still: is the ESCB not too independent? • Which yardstick to take? checks and balances: the degree of independence should be seen against the degree of Accountability.

ACCOUNTABILITY • The governors (Delors Report, draft Statute) had also an eye for accountablity right from the start: • they mentioned that publicly (speeches of de Larosière 1989 -1991): appointment procedures and reporting; and their Commentary with their draft ESCB Statute. • In the Dutch central bank it was found a very important aspect – without accountability mechanisms the Bank would come under pressure.

• Best known accountability mechanisms in Statute/Treaty: • Appointment of Board members by Executive (no role EP? ) • Hearings at the EP • Mechanisms to coordinate between fiscal and monetary policy thro mutual attendance (each being master of its own domain) • Financial reporting requirements (quarterly, annually)

• Accountability of the ESCB is also based on: • Role European Court of Auditors (efficiency test) • Role Court of Justice • Narrow mandate • Law-based (the law can be changed)

• ESCB is more accountable than Bundesbank: • The ESCB has a narrower mandate: elected bodies and the public can evaluate performance easier and at the same time less room for political interference. • Board members cannot be reappointed, and thus will not be led by invisible considerations. • The ECB appears before parliament. This increases accountability, and because EP and Executive do not have parallel interests, it increases independence.

• The governors made great strides towards accountability. Most of the accountability aspects had been proposed by the governors. (IGC only added the ECA). • Compared to other central banks the ESCB is doing well in terms of accountability, esp. when the ECB’s practice is taken into account. According to academics only the Bo. E scores higher (Minutes, Override and law/treaty status).

• In fact, the examples show that measures that increased accountability also increased independence (no trade-off!). Independence and accountability are not each other enemies. • In sum: the high degree of independence seems balanced with a high degree of accountability. • Nonetheless, the ESCB is criticized for not being accountable enough:

Too little accountability? • 1. The Gov. C should publish votes? Counterargument: in case of the ESCB it will trigger national pressure on the NCB presidents. (Btw they don’t vote. ) However, yes: summaries of Gov. C discussions could be published instead of the polished (and therefore biased) introductory statements after each meeting. It allows for a better check by the EP.

• 2. Formal approval by the EP for appointment Executive Board members. (Would also improve independence. ) Makes sense. • 3. An override mechanism? (‘Credibility depends more on a good track record than to formal independence. ’) Argument against: who would use it (Ecofin? !), what would be the safeguards against electoral misuse? ; esp. difficult at the European level. Once misused, credibility gone! • 4. Should the government define price stability? ?

TRANSPARENCY • Accountability is not the same as transparency for two reasons: the recipient is different and the motives are different. Accountability is towards the public or democratically chosen bodies, and transparency is aimed at conveying the right message to the markets.

• Example Federal Reserve: • FED accountable (towards Congress). • But before 1994 the FOMC did not publish its interest rate decision (directive for NY covering the next 6 weeks) – markets had to guess it from the FED’s actions (not transparent). • It published its minutes after the next FOMC’s meeting. (More recently: votes shown immediately. )

• EUROPE: the same is true for Europe, there was no tradition of transparency at the time the Statute was written and the governors paid scant attention to it when drafting the Statute. • No other article on transparency than an obligation to publish quarterly financial reports and an Annual report. Confidentiality was the rule (EMS).

• WHY has transparency become so much more important in the US (and elsewhere)? • Quotation from Goldman and Sachs (in FT): • ‘. . . tremendous shift to transparency is because of the growth and dominance of the capital markets. The monetary policy impulse is driven by how they [markets] react, so it is more important that those markets understand what the Fed intends. ’

• Indeed, when Statute was written capital markets were less important for monetary transmission. Transparency only part of Central bank laws written after the early nineties. • But transparency forms vary: e. g. degree of desired transparency is dependent on monetary policy strategy; Europe pre-EMU: XR stability required secrecy about deliberations!

• When the ECB was established in July 1998, Duisenberg announced improvements: • Immediate press statement and press conference after Gov. C meetings. • A Monthly (not only quarterly) ECB Bulletin. • He announced a monetary strategy: October 1998, which contained a definition of price stability: between o and 2% per year over the medium term (later: up to and close to 2%).

• He furthermore announced he would go four times a year to the specialised European Parliamentary committee (basically a form of accountability), where again he would explain the ECB’s strategy.

ESCB’s transparency insufficient? • Biggest problem for the ECB is: too much communication (press statements, press conferences, speeches, four time EP, Monthly Bulletins, Annual Report). • There was a lot of disclosure, but not a lot of understanding. • Better: less frequent press conferences and a summary record of the Gov. C meetings.

Summary • Independence modelled to the Bundesbank, but stronger, because of different environment. • Accountability also stronger than that of the Bundesbank. • ACC and IND have strengthened each other in many cases. • Is Accountability strong enough? That question has to be answered looking at the degree of independence. Both are at a high level.

Summary • Many proposals for stronger accountability usually do not convince, because they do not take the institutionalpolitical environment into account. • Is independence safe enough? Quote in FT of 31 August of the French minister of Foreign Affairs: ‘resolute dialogue’, ‘let us not leave economic and budgetary policy to the ECB, let us not leave it to the European Commission, to people who are not elected. ’ • Independence in the European context will never be safe!

Annexes for hand-out • Separate sheets on: USA (1913), articles of ESCB Statute making independence operational, European central banks in 1980 s.

App. 1: USA 1913 • Main goal (1913) preventing financial crises thro provision of an ‘elastic currency’ and better supervision. Too complicated for Congress delegated this to the FED (Federal Reserve Act). Reference to stable prices only in 1977 (art 2 A-FRA: ‘promote the goals of maximum employment, stable prices and moderate long-term interest rates’).

App. 1: USA 1913 • The US had been without a central bank since 1836. • Administration: no grip on FED except for appointment of members of the Board of Governors (Senate approval required). Shares Federal Reserve Banks not owned by government. • Checks and balances within the government: Congress will not allow instructions by Administration.

App. 2: Independence design • No instructions be taken, sollicited or given (Art. 7). • Minimum long tenure (eight years for ECB Board members, and at least five for governors) and protection against dismissal (Art. 11. 2/4 and 14. 2) • Availability and independent use of instruments (Art. 1724). Important: no direct instruments. • ECB has its own capital, income and arrangements to cover losses by NBCs (Art. 28 -34), NCBs are shareholders of ECB.

App. 3: Europe 1980 s • At that time (1990) most European central banks had to conduct monetary policy in accordance with (or taking due account of) the government’s policy. • Most common objective of those days (1980 s) was safeguarding the currency (which had an internal and external dimension):

App. 3: Europe 1980 s Highlights: • Four: no clear objective (BE, GR, IT and UK) • The Bundesbank shall regulate the amount of money in circulation and of credit supplied to the economy using the monetary powers conferred on it by this Act, with the aim of safeguarding the currency, … • Banque de France is the institution which, in the framework of the economic and financial policy of the nation, receives from the State the mission of watching over the currency and credit.

• See also C. C. A. van den Berg (2005), The Making of the Statute of the ESCB and of the ECB, Dutch University Press