The accountability of the European Central Bank: New frontiers,new challenges

Abstract

Over the years, the European Central Bank (ECB) has taken on new tasks in response to fresh challenges, and its mandate has been interpreted in novel ways. This broader role for the ECB – whether it translates into a novel interpretation of its mandate, the creation of a new form of public money, more complex and discretionary decision-making, or the conferral of new tasks – has brought greater scrutiny onto the ECB. This introduction and the contributions to this special issue focus squarely on the “new” or “modern” ECB. They examine its accountability across the range of tasks that it nowadays carries out, including its interinstitutional relationships with other actors in this area. Although the ECB has assumed a broader role than the one envisaged at the time of its creation, its accountability framework, which is by and large hardwired into the Treaties, has remained unchanged. It is argued that the expansion of the ECB’s role and tasks must be accompanied by robust accountability and transparency arrangements. As the ECB pushes new frontiers in the future, those options to enhance accountability, transparency and legitimacy which are available within the existing Treaty framework should be pursued. This would also ensure that the ECB and other relevant authorities go far enough in meeting their objectives.

1. Introduction

Since its creation, the European Central Bank (ECB) has sought to make a significant contribution to price stability and, more broadly speaking, to financial stability. As ‘the central bank of the European Union countries which use the euro’, ¹ it is in charge, through the European System of Central Banks (ESCB), of monetary policy for those Member States. ² As a consequence, the ECB is exercising a great deal of public power, but is outside the trias politica. Monetary policy is ‘delegated’ to the independent ECB and is thus beyond the day-to-day reach of elected politicians. In line with the economic thinking that prevailed at the time of the ECB's creation, its original mandate in monetary policy was narrowly circumscribed and underpinned by a strong independence. ³ Unsurprisingly, scholars have taken an interest in its legal and institutional arrangements, as well as its independence, accountability and legitimacy regimes, ever since its early – somewhat more halcyon – days. ⁴

Over the years, the ECB has taken on new tasks in response to fresh challenges, and its mandate has been interpreted in novel ways. It is the proliferation of its responsibilities and powers, and the expansion of its activities, notably since the financial and sovereign debt crisis, that has brought greater scrutiny onto the ECB. ⁵ To help combat the crisis, the ECB resorted to ‘unconventional’ (or ‘non-standard’) monetary policy instruments, and was also involved in negotiating and monitoring the conditions attached to the financial assistance programmes for euro area Member States. Moreover, it acquired a new role in banking supervision within the context of the Single Supervisory Mechanism (SSM), where it directly supervises the ‘significant’ (i.e., larger) banks of the participating countries and ensures a consistent approach in the supervision of ‘less significant’ (i.e., small and medium-sized) banks by the national authorities. In addition, the ECB was granted important powers in the framework for restructuring (‘resolving’) failing banks within the context of the Single Resolution Mechanism (SRM), and is responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. More recently, in response to the COVID-19 crisis, the ECB's role in crisis management was again broadened. ⁶ The ECB is rightly described by Amtenbrink as ‘a very potent institutional force at the heart of the European (economic and monetary) integration project’. ⁷ Other commentators, such as Curtin, go further, noting that the ECB has emerged as ‘the most central – and powerful – supranational institution of our times’. ⁸ What is not in doubt is that, overall, the ECB exercises a great deal of public power, while operating at arm's length from the other EU institutions and the Member States. ⁹ In our view, it is not only the degree of insulation from political institutions that is significant here, nor is it only the large number of varied tasks it is called upon to assume, but also the magnitude of the socio-economic consequences (including ‘side-effects’, as they are commonly framed in this debate) that the exercise of its tasks can entail.

The deeper problem that lurks here is that the instruments employed by the ECB, and sometimes even the goals pursued (or the interpretation thereof), are contested. This discontent has also been expressed in legal terms, with two high-profile cases (Gauweiler and Weiss) on the use made by the ECB of its monetary policy instruments during the financial crisis reaching the Court of Justice of the European Union (CJEU) through the preliminary reference route ¹⁰ – and one of them even culminating in an open challenge to the supremacy of EU law (the PSPP judgment by the German Federal Constitutional Court in the Weiss case), as neither the ECB's actions nor the CJEU's interpretation were accepted by the referring court. ¹¹ The more the ECB's responsibilities, powers and tasks are expanded, the more scope there is for disagreement as to its policies, as well as for criticism coming from all possible directions. The ECB can be simultaneously framed as both ‘too hawkish’ and ‘too dovish’, as well as both too timid and too bold in responding to the challenges of our time. What is more, the expansion of the ECB's activities has given rise to questions regarding the appropriateness of the legal and institutional framework operating in this area – a framework which is laid down in the EU Treaties ¹² and dates, for the most part, back to the Maastricht Treaty. ¹³

This special issue focuses squarely on the ‘new’ or ‘modern’ ECB. It examines the accountability of the ECB across the range of tasks that it nowadays carries out. Although the ECB has assumed a broader role than the one envisaged at the time of its creation, its accountability framework, which is by and large hardwired into the Treaties, has remained unchanged. Any changes that have occurred have taken place either at the level of secondary EU law (notably with respect to banking supervision) or in practice, namely in the ECB's interaction with the European Parliament and in its communication strategy. The practices have evolved, but not so much the framework. ¹⁴ How does the need to respond to new challenges and risks (e.g., those posed by, inter alia, climate change, the digital transition, critical market infrastructures and the COVID-19 pandemic), and the concomitant increase in the powers of the ECB and – where relevant – of other independent expert agencies such as the European Supervisory Authorities (ESAs), affect their independence and accountability? What is the appropriate level, type and degree of accountability and independence for their diverse tasks? Specifically, has the ECB's accountability and transparency framework evolved sufficiently to match its expanded powers? Is there a way of accommodating technocratic independent institutions and agencies (notably, independent monetary authorities and financial supervisors) in the EU system of governance without jeopardizing democratic legitimacy and without sacrificing the benefits that they bring?

This special issue includes contributions from a conference held in Rotterdam on 28–29 November 2022. This event brought together academics as well as EU and national officials to discuss the accountability of the ECB across its main domains of action, including its interinstitutional relationships with old and new actors in the field of Economic and Monetary Union (EMU). Thirty years since the Maastricht Treaty, which laid down the legal and institutional framework for the EMU, and twenty years since the introduction of euro coins and banknotes, the time is, in our view, particularly ripe for this type of inquiry. The ECB's recent monetary strategy review, together with its climate action plan (both from July 2021), provide further fertile ground for a novel and all-encompassing reflection. ¹⁵ The same is true for the recent plans for a digital euro (currently in its preparation phase), ¹⁶ as well as the changes made to EU financial law more broadly, including, but not limited, to the mandate of the European authorities entrusted with the micro- and macroprudential supervision of the financial system in the Union, with which the ECB regularly interacts and in whose functioning it is actively involved. ¹⁷

The key emphasis in this special issue is placed on a range of topics that are pertinent to the increase (or change) in the ECB's activity and – where appropriate – in the activity of other EU institutions, bodies or agencies, such as the European Systemic Risk Board (ESRB) and the ESAs. Accordingly, we have opted to focus on:

climate change and the role of central banks and financial supervisors (with emphasis on monetary policy and banking supervision); ¹⁸

digitalization in the EMU, thereby focusing on the ECB's plans for a digital euro, as well as the regulation of crypto assets and their potential effects for monetary policy;

current monetary policy instruments, with particular emphasis on the outcome of the monetary strategy review and the ECB's recent measures in response to the pandemic and beyond;

the ECB in macroprudential supervision and financial stability more generally.

The authors were invited to analyse the role of the ECB – and, where appropriate, of other institutions, bodies and agencies and/or of their interrelationship with the ECB – with respect to the topics adumbrated above. They were further asked to consider the implications of the developments they address in their respective contributions for the ECB's accountability, as the case may be. Moreover, they were encouraged to make proposals for enhancing the existing legal and institutional framework, as well as – where appropriate – the ECB's transparency, accountability and democratic legitimacy, whilst keeping in mind that some of these reforms could be implemented without changing the EU Treaties, whereas others could require a Treaty revision.

Although there is already a significant body of research on the ECB's accountability, ¹⁹ the perspective adopted in this special issue covers new ground and brings new elements to the existing debate, whilst also building on and complementing the existing literature on this topic. Not only does this special issue adopt a holistic approach, thereby covering the ECB's main domains of action, but it also addresses developments that are fairly recent such that they have not yet been thoroughly analysed. This includes, for instance, the most recent evolutions in the ECB's monetary policy, with novel instruments such as the Transmission Protection Instrument ²⁰ or the steps taken by the ECB to decarbonize its corporate bond holdings. ²¹

In what follows, we will lay down the necessary background to the articles included in this special issue, as well as provide a high-level indication of the content covered and the main arguments therein. We will discuss the following topics in turn: climate change and the role of the ECB as a monetary policy authority and banking supervisor; the digital euro; current monetary policy instruments; and the ECB in macroprudential supervision.

2. Climate change and the role of the ECB

One of the issues with which the ECB is confronted is the fight against climate change, and partaking in this fight is a new frontier for central banks in general. ²² Indeed, through the manner in which they employ their monetary policy instruments, central banks can address climate-related risks and support mitigation and adaptation policies. Although it may seem both obvious and necessary that they do so, in light of their immense financial firepower, a key factor here is whether such action is compatible with their mandate, as well as whether there are any legal limitations with respect to the action they can take. Insofar as climate risks may impact on monetary and financial stability, ‘most central banks will have to incorporate climate- and mitigation-risks into their core policy implementation frameworks in order to efficiently and successfully safeguard price and financial stability, even if their mandates make no explicit reference to sustainability’. ²³ But just how far could central banks go – or how proactive should they be – in combatting climate change, within their respective mandates and objectives? ‘A potential role of central banks in promoting sustainability in the financial system and “greening” the economy is more contentious, not least because of the possibility of distorting effects that direct interventions into the market aimed at “greening” the economy might have, but also due to potential conflicts with the central banks’ primary goals.’ ²⁴ To be sure, the Member States and other EU institutions (where competent to act) are principally responsible to manage environmental and social sustainability risks, because of the control they exert over taxation, expenditure, legislation and regulation. ²⁵

The ECB's new monetary policy strategy outlines its view that ‘[its] mandate requires [it] to assess the impact of climate change and to further incorporate climate considerations into its policy framework, since physical and transition risks related to climate change have implications for both price and financial stability, and affect the value and the risk profile of the assets held on the Eurosystem's balance sheet.’ ²⁶ The ECB's climate-related action plan outlines the key areas of ongoing and planned actions to more systematically reflect climate change considerations in the ECB's monetary policy operations. ²⁷ In addition to the incorporation of climate factors in its monetary policy assessments, the ECB aims to adapt the design of its monetary policy operational framework in relation to disclosures, risk assessment, corporate sector purchases and the collateral framework. ²⁸

The ECB is required to take environmental considerations into account when pursuing the objective of price stability, and to support the general economic policies in the Union pertaining to combatting climate change with a view to achieving the objectives of the Union as laid down in Article 3 TEU (Article 127(1) TFEU). In addition, according to Article 11 TFEU, environmental protection requirements must be integrated into the definition and implementation of the Union's (therefore also the ECB's) policies and activities, in particular with a view to promoting sustainable development; and Article 37 of the EU Charter of Fundamental Rights, which also binds the ECB as an EU institution (Article 51(1) EU Charter), requires that a high level of environmental protection and the improvement of the quality of the environment be integrated into the policies of the Union and ensured in accordance with the principle of sustainable development. ²⁹

Furthermore, it will be recalled that, according to Article 7 TFEU (the so-called ‘consistency clause’), the Union shall ensure consistency between its policies and activities, taking all of its objectives into account and in accordance with the principle of conferral of powers. Seen in this light, it is not only logical but also legally required that the ECB ‘ensure its policies and activities are congruent with those of the EU at large’ with respect to climate change. ³⁰ In this connection, it is argued that the ECB should ‘refrain from making decisions that counter policies promoted by other institutions’ and ‘positively consider them in the design of their own policies’. ³¹ Support for this argument may also be drawn from the Gauweiler judgment, according to which the ECB's actions cannot be such as to contravene the effectiveness of the general economic policies in the Union. ³²

Last but definitely not least, Article 216(2) TFEU provides that agreements concluded by the Union are binding upon the institutions of the Union and on its Member States. This would seem to indicate that the Paris Agreement, which was adopted by 196 Parties at the UN Climate Change Conference (COP21) on 12 December 2015 and entered into force on 4 November 2016, also binds the ECB. However, there are divergent views in the relevant literature with respect to the ECB's obligations under this agreement. ³³ The European Parliament is less ambiguous on the matter. ³⁴ In any event, it should be noted that the European Climate Law, which sets out the overall framework for the Union's contribution to the Paris Agreement, mandates the ‘relevant Union institutions’ and the Member States to take the necessary measures to achieve the Union's climate targets, as well as to ensure continuous progress in enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change. ³⁵

Against this background, Rosa María Lastra and Sara Dietz explore whether the existing legal framework allows an interpretation and understanding of the ECB's mandate that incorporates sustainability goals, as well as how sustainability objectives could be operationalized in the actual conduct of monetary policy. The ECB is placed in its broader institutional context, which also encompasses other EU institutions, bodies and agencies endowed with their own powers, as well as the Member States. In the opinion of the authors, the question of whether and to what extent the ECB objectives and tasks could be ‘greened’ also depends on the possibility to integrate such an augmented mandate with adequate accountability requirements.

Lastra and Dietz focus squarely on the ‘greening’ of monetary policy, in light of the Climate Change Action Plan and the further steps taken by the ECB to incorporate climate change considerations into its monetary policy operations. They argue that, while the ECB has to take environmental considerations into account when implementing its monetary policy, the specific measures in question must remain within the competence conferred on the ECB by Article 127 TFEU. Neither Article 3 TEU nor Article 11 TFEU could be used, in their view, to expand the competence structure enshrined in Article 127 TFEU. The ECB has to take environmental considerations into account when conducting and implementing its monetary policy and has to support sustainability objectives within its monetary policy operations, as long as this does not run contrary to price stability. However, the authors remain sceptical as to whether the ECB may – within its corporate bond purchases or its collateral framework – take measures that directly discriminate against ‘brown’ counterparties, bonds or assets by treating ‘green’ bond issues and corporations better. ³⁶

Lastra and Dietz highlight that the task of ensuring democratic legitimacy throughout the life of an independent institution lies at the heart of accountability mechanisms. However, in their view, accountability mechanisms may not be construed in such a way as to allow the executive to de facto instruct the institution concerned with regard to those tasks for which it enjoys independence and/or discretion. In their view, the ECB has to provide more reasoning for selecting sustainability and climate change above other objectives, and explain how climate change is concretely affecting its mandate. They argue that the standard of accountability is heightened whenever the ECB is shifting away from the principle of market neutrality, and highlight the need for combining traditional forms of accountability with new ones. More specifically, they propose that the Monetary Dialogue with the European Parliament be strengthened, thereby drawing inspiration from the inquiries that the House of Lords Economic Affairs Committee has conducted into various issues. They further refer to consultations, impact studies and proportionality assessments, external reviews of central bank actions and the setting up of an Independent Evaluation Office. ³⁷

David Brinkman's paper shifts the focus to climate-related and environmental risks (C&E risks) and ECB banking supervision. ³⁸ The ECB as banking supervisor looks at climate change and environmental degradation insofar as they pose financial risk that may affect the safety and soundness of credit institutions and the stability of the financial system. C&E risks clearly have the potential to significantly impact the financial position of banks. But how should banks deal with C&E risks? Do banks ‘simply’ need to manage the risks that climate change poses for their operation (‘single materiality’)? Or should they also mitigate their own impact on climate (‘double materiality’)?

As explained by the author, the ECB has taken a number of actions in order to bring C&E risks to the attention of the banks it supervises. In 2020, it set out its supervisory expectations regarding C&E risks. ³⁹ In 2021, it asked ‘significant’ banks to conduct a self-assessment of their current practices against these expectations. At the time, none of those banks were close to fully aligning their practices with the supervisory expectations. ⁴⁰ In 2022, the ECB performed a climate risk stress test, ⁴¹ as well as a thematic review of banks’ capabilities to steer their C&E risk strategies and risk profiles. ⁴² The ECB intends to fully integrate C&E risks in the regular supervisory cycle and treat them in the same way as any other material risks that banks face. All banks must comply with all of the ECB's supervisory expectations by the end of 2024.

Brinkman further outlines the challenges remaining with respect to C&E risk management. The time horizon favoured by banks for defining their business model and setting their strategy seems to be mostly around 3–5 years, which conflicts with the time horizon of the longer-term materiality of C&E risks. Banks also need sufficient granular data for their models that can be compared across jurisdictions or sectors, which underscores the need, according to the argument, for more disclosure requirements and harmonized standards at EU level. The author carefully outlines the relevant disclosure requirements, whether prudential in nature or not. As argued by the author, although the ECB has thus far provided granular guidance to banks regarding how C&E risks are likely to affect their risk management (which is, as argued, ‘clearly a single materiality approach’), if one were to look at the requirements that will soon be introduced, an argument could be made that the supervisory approach might move in the direction of double materiality. So far, the ECB has not yet taken double materiality into account in its supervision. However, if some of the legislation discussed in this article were to be adopted, the ECB could be required in the future to take into account whether a bank's business model is clearly misaligned with the objectives of the Paris Agreement.

Last but definitely not least, David Ramos Muñoz, Marco Lamandini and Carlos Bosque Argachal focus squarely on the political and administrative accountability of the ECB in the SSM. As regards access to information by Parliament, they propose regular and thematically-structured confidential checks and controls over the ECB's activities, involving (i) periodic confidential exchanges of documents and information, (ii) closed-door (follow-up) meetings and (iii) where necessary, on-site fact-finding visits. In their view, this structured access would reconcile confidentiality with openness and cooperation, and should also comprise internal documents upon request, provided that they are not classified.

Moreover, accountability would improve, so their argument goes, if the Committee on Economic and Monetary Affairs (ECON) acted as a single body with a strategy. The authors further highlight issues of coordination between the European Parliament and national parliaments, as well as between political and administrative accountability fora, focusing on the role of the European Court of Auditors, the European Ombudsman and the European Banking Authority. As regards climate change, the authors argue in favour of more intense dialogue between central banks and supervisors and political institutions about the nature of risks, the plausibility of different scenarios, the considerations of policy and value involved in technical assessments and the pace and nature of adjustment needed to avoid the more dramatic scenarios. Unfortunately, in the authors’ assessment, ‘there seems to be little evidence that political (or technical) actors have understood the kind of accountability (and thus dialogue) that is needed’, as evidenced, for example, by the number of questions addressed by MEPs to the ECB regarding climate change. In the view of the authors, the public hearings at the European Parliament with the Chair of the SSM Supervisory Board and the related briefings also leave much to be desired. ⁴³

3. The digital euro

The discussion thus far has focused on climate change and the role of the ECB as a monetary policy authority and banking supervisor. We now turn to consider another modern-day development, namely the possible issuance of a digital euro.

The digital euro would be a central bank digital currency issued by the ECB and available to the general public. It would be ‘exactly like cash, just in a digital version’ ⁴⁴ and directly backed by the ECB. As an electronic equivalent to cash, it would complement banknotes and coins, thereby giving people an additional choice about how to pay. The ECB would guarantee its safety, stable value and that it could be exchanged at face value for cash.

The European Commission has recently put forward the Single Currency Package, which comprises two ‘mutually supportive’ legislative proposals, both based on Article 133 TFEU: a legislative proposal on the legal tender of euro cash aiming to safeguard the role of cash; and a legislative proposal establishing the legal framework for a possible digital euro. ⁴⁵ The first proposal aims to ensure that cash is widely accepted as a means of payment and that it remains easily accessible for people and businesses across the euro area. The second proposal sets out the legal framework and essential elements of the digital euro, and it would enable – if adopted by the European Parliament and Council – the ECB to eventually introduce a digital euro. It is ultimately up to the ECB to decide if and when to issue the digital euro. The digital euro could be issued on the basis of Articles 128(1) TFEU and 16 ESCB/ECB Statute. ⁴⁶

The digital euro would be available alongside existing national and international private means of payment, such as cards or applications. It would work like a digital wallet. People and businesses could pay with the digital euro anytime and anywhere in the euro area. Notably, it would be available for payments both online and offline, meaning that payments could also be made from device to device without an internet connection. A great deal of emphasis is placed on privacy in the relevant Commission documentation. The Commission notes that nobody would be able to see what people are paying for when using the digital euro offline.

Banks and other payment service providers would distribute the digital euro to people and businesses. Basic digital euro services would be provided free of charge. To foster financial inclusion, individuals who do not have a bank account would be able to open and hold an account with a post office or another public entity. Merchants across the euro area would be required to accept the digital euro, except for very small merchants who choose not to accept digital payments (due to proportionality considerations). The wide availability and use of digital central bank money would be important for the EU's monetary sovereignty and also against the backdrop of crypto currencies.

The Commission notes that this proposal is ‘the start of a long democratic process’, also involving the EU's legislative institutions. ⁴⁷ Democratic accountability is key, in our view, both during the design as well as the implementation phase of a digital euro, and also concerning the actions of the ECB. The ECB would still be the one to take the final decision on the issuance of a digital euro, as the euro area's monetary policy authority. The Commission notes that this is likely still a number of years away (at least not before 2028). This project will also require significant further technical work by the ECB. ⁴⁸

Seraina Grünewald comments that the introduction of a digital euro would be ‘a momentous decision, with profound societal consequences’. And yet, as she argues, little attention has been paid to the ECB's accountability in the process of adopting the digital euro and beyond. The novelty of the digital euro and the large societal impact it would have raise the question of whether the ‘conventional’ accountability arrangements pertaining to the ECB's actions as monetary policy authority are sufficient in this case. The author argues that the concept of ‘independent accountability’ is not the appropriate standard to hold the ECB accountable for its decisions regarding the digital euro. This is so, according to the argument, for three reasons. First, while the ECB has the power to issue a digital euro with cash-like features, its mandate is not clear-cut, nor are its decisions merely technical in nature. This flies in the face of the standard justification that the ECB's accountability can be limited due to its clear mandate that is confined to largely technical choices. Second, the digital euro affects areas in which the ECB has no specific expertise or authority, such as privacy, and its adoption requires an unprecedented level of coordination with the EU co-legislators, which have the competence to adopt various parts of the broader legal framework for the digital euro. The delineation of competences between the ECB and the EU legislator is important, as it determines whether design choices, and their amendment in the future, are the subject of a democratic process. High accountability and transparency standards should apply to the ECB when implementing the legislator's choices, notably when establishing the digital euro's privacy-related design features (or when changing them afterwards). Third, the ECB must also engage with market actors and citizens to ensure the digital euro's success. The ECB's outreach to private stakeholders mainly seeks to ensure the digital euro meets users’ needs and is both technically feasible and state-of-the-art. It implies a different modus operandi for the ECB compared to ‘conventional’ accountability arrangements, with the ECB consulting stakeholders ex ante and seeking to learn from their expertise, experience and preferences. What is needed, in the author's view, is a new accountability standard regarding ECB decision-making, with a broader range of ‘accountability stakeholders’ and a stronger role for ex ante consultations.

Giovanni Zaccaroni examines the legal and technical design issues emerging from the Commission's legislative proposal for a regulation establishing the digital euro and from the preparations by the ECB. He places central bank digital currencies (CBDCs) in the wider context of digital currencies, which raise questions, as he argues, with respect to accountability as well as the financial stability of the euro area. He emphasizes that both the rationale and the technology underpinning CBDCs are not the same as those that apply to traditional crypto assets. He outlines the options available to policy-makers in terms of digitalization in this area, which include, in the author's view, the digitalization of credit transfers (which produces, from the point of view of end users, a very similar result to digital currencies), the introduction of a centralized CBDC and a fully or partially decentralized digital euro. ⁴⁹ The ECB has a broad mandate to decide on the technical features of the digital euro, as well as the possibility to intervene in the relevant legislative procedure (since it is consulted according to Article 133 TFEU). However, it seems that there is little oversight of the technical discretion that is enjoyed, and would be exercised, by the ECB with respect to the digital euro. The author argues that the final decision to issue the digital euro is a political one and that it should be possible for the EU policy-making institutions to challenge it. Furthermore, in his view, the decision on whether to introduce holding limits for the digital euro is also a political one and should be vested with the EU co-legislators. Further, the author identifies various design issues which would need to be further clarified by the co-legislators or for which the European Parliament should take the lead and introduce the public to the relevant debate. Overall, the author argues that the proposed digital euro could be very similar to its ‘old’ physical counterpart. This reinforces, in his view, the argument that the EU legislator should be in a position to take an informed decision on the digital euro.

4. Current monetary policy instruments

The increase in the ECB's powers and discretion over time and the evolution of its role are among the main common threads running through this entire special issue. Alicia Hinarejos and Dražen Rakić note that the Global Financial Crisis (GFC) and the European sovereign debt crisis have brought new challenges related to monetary policy objectives and instruments, and that key tenets of the pre-GFC balance between independence and accountability were brought into question. ⁵⁰ The new roles assumed and the new (non-standard) monetary policy instruments employed by central banks, including the ECB, have brought into sharp relief the relevant accountability framework. They further – rightly – note that the debate on the ECB's accountability is now once again reinvigorated, due to a number of factors. First, central banks were forced after the GFC to resort to non-standard monetary policy instruments for a prolonged period of time, due to the low-inflation environment and the constraints of the effective lower bound on their traditional monetary policy instrument (short-term interest rates). In the EU, this has led to significant discussions and disputes about the legality, effectiveness and side-effects of these instruments. Thereafter, the ECB employed non-standard instruments at an unprecedented scale in response to the COVID-19 crisis. Apart from the scale of monetary accommodation, its policy response was also characterized by considerable flexibility compared to earlier instruments. Second, as hinted earlier in this introduction, the ECB has decided to take a more open approach to the interpretation of its secondary objective(s). The monetary policy strategy review resulted in the incorporation of climate change considerations in the ECB's monetary policy framework. Third, the inflationary pressure that started building up in 2021 has led to double-digit inflation for the first time in the history of the euro area. High inflation and the side-effects of rapid monetary policy normalization have thrust the ECB – and its accountability – to the centre of public debate.

Hinarejos and Rakić discuss three key dimensions of central bank design and, more broadly speaking, of the institutional setting within which the ECB operates: independence, discretion and accountability. ⁵¹ They argue that complete or unconstrained discretion may endanger the (substantive) independence of monetary policy, ⁵² hence the need for ‘constrained discretion’. The ECB's discretion is principally constrained by its primary objective (price stability), but there are also other constraints enshrined in the EU Treaties (such as the Article 123 TFEU prohibition on monetary financing). Compliance with these constraints is ensured through accountability. Accountability is, according to the authors, ‘a necessary check on the ECB's discretion…and a necessary buttress for independence’. In their assessment, ‘facing a succession of crises since 2008, and being in the unique institutional setting of the [EMU], the ECB has progressively moved closer to the limits of that discretionary power.’ As a result, its policy innovations and use of discretion have met with significant legal challenges. An appropriate balance needs to be struck between independence, discretion and accountability, even if the framework within which the ECB operates poses special challenges.

Moreover, the relationship between independence, discretion and accountability has evolved over time, as the ECB has exercised a greater degree of discretion since the euro area crisis. In terms of more recent monetary policy developments, Hinarejos and Rakić focus on the outcome of the monetary policy strategy review and the Transmission Protection Instrument. They argue that these developments and decisions will lead to a much higher degree of discretion on the part of the ECB, and that accountability practices have not evolved in a commensurate manner. They put forward a number of proposals aiming to improve, to some degree, the accountability of the ECB to the European Parliament ⁵³ and to address the current imbalance between independence, discretion and accountability. In their words, ‘[m]ore complex and obscured monetary policy requires more sophisticated accountability arrangements.’ The authors’ proposals centre around the disclosure of non-public monetary policy information to parliamentarians (under strict confidentiality arrangements and perhaps with certain additional safeguards to conform to independence requirements); and a strengthened self-evaluation and independent evaluation of monetary policy.

Klaus Tuori's article focuses on a different kind of accountability for central banks. His core claim is that the ECB is ultimately accountable for providing people with money that they can use and trust. Such an approach views the credibility of a central bank in achieving its inflation target, on the one hand, and its accountability, on the other hand, as intrinsically linked. The ECB differs from other major central banks because it has a larger sphere of discretion and independence, which, according to the author, gives it more credibility in maintaining price stability. However, if it were to lose its credibility, the same independence could actually lead to more difficulties in regaining it.

Against this background, Tuori's article discusses how the ECB is facing the first real inflation shock of its history from the perspective of its accountability. The key argument is that the ultimate accountability benchmark for central banks is public trust in money, which distinguishes them from other parts of public administration, and which could have also explained or even legitimized the exceptional independence of the ECB. The author argues that the ECB is constitutionally well positioned and equipped to deal with the inflation shock thanks to its independence and its clear price stability objective. However, the ECB's policy measures during and after the GFC and its new monetary policy strategy point, according to the author, to more mixed results, particularly because of the insistence on flexibility and the large number of other (perceived) goals and aims, which could also come into conflict with one another. The ECB's conduct of monetary policy might not fit squarely with the model of a pure inflation-targeting central bank. According to the author, the more flexible and multifaceted ECB model might have some benefits, but it creates challenges in making the new strategy the basis for the ECB's communication and accountability towards the general public and the financial markets.

Broadly understood, the ECB's communication could be framed as ‘the real monetary dialogue’ with people and the financial markets, which complements ‘the formal monetary dialogue’ between the ECB and the European Parliament. On this reading, the ECB's decisions and their reasoning have their counterpart in the perceptions and expectations of the public and the financial markets. This communication is currently facing enormous challenges, as the inflation process has shown signs of becoming more self-sustained. Consequently, the argument goes, the ECB's communication needs to address two pressing issues, namely why the ECB's forecasts failed to detect the sustained inflation process and how its large balance sheet – resulting mainly from the legacy of the quantitative easing policy – is taken into account in assessing the current monetary policy stance and how it affects the conduct of monetary policy going forward.

The implementation of monetary policy may also entail profits or losses for central banks. For example, remunerating ‘minimum’ reserves (namely, compulsory deposits that banks hold on accounts with the national central banks) leads to a transfer of central bank profits to commercial banks. ⁵⁴ In the current environment, as explained by David Baez in his contribution, several euro area central banks are facing losses from the implementation of monetary policy. This situation is particularly interesting from the viewpoint of the principle of financial independence, which the author discusses in light of the Court's judgment in Banka Slovenije. ⁵⁵ Under a narrow view of financial independence, it suffices that central banks are de jure able to avail themselves of sufficient financial resources by creating reserves. However, under a broader view, we may also need to cater for situations where central banks operate with large losses for a prolonged period of time, so that the credibility of monetary policy would not be impaired. If the state were to provide capital as a ‘last resort’ option, the central bank concerned would not be incentivized to use monetary policy for generating profits or reducing losses, which could come at the expense of price stability. In terms of accountability, such intervention by the state could lead to requests at the national level for the central bank concerned to explain how this additional capital would be preserved in the future, notwithstanding the fact that accountability for monetary policy related activities is principally owed at the EU level (through the ECB).

In addition to discussing mechanisms for improving the financial independence of central banks (such as granting flexibility in the creation of financial buffers and in determining the role of central bank capital through the amendment of central bank statutes), Baez proposes that Member States establish recapitalization rules for the central bank that apply automatically once losses reach certain levels (‘automatic recapitalization rules’). However, the author's preferred option is a targeted reallocation from the euro area national central banks to the ECB of interest income paid by them that would otherwise result in large losses or of losses arising from monetary policy instruments (i.e., purchase programmes). The proposed reallocation mechanism would lessen the financial impact of the monetary policy function on euro area national central banks. Furthermore, as argued by the author, it could lead to further improvements in the accountability practices and arrangements between the ECB and the European Parliament, within the requirements set out in the Treaties.

5. Macroprudential supervision

Whereas microprudential supervision is concerned with the safety and soundness of individual institutions, macroprudential supervision focuses on the safety and soundness of the financial system as a whole. ⁵⁶ ‘Macroprudential measures aim to increase the financial system's resilience to shocks by addressing identified systemic risks. Macroprudential authorities monitor the financial system, identifying risks and vulnerabilities, and implement measures to ensure financial stability.’ ⁵⁷

In the aftermath of the GFC, some jurisdictions have modified their legislation to adopt new macroprudential tools. These frameworks give authorities tasked with macroprudential supervision the mandate to activate these policies or to issue recommendations for other authorities to act. A survey covering 82 jurisdictions reports that central banks are the leading authority for macroprudential policy in the largest number of jurisdictions. This is more likely to be the case when the central bank is also responsible for the microprudential supervision of banks. In other cases, responsibility for macroprudential policy is assigned to the supervisory agency which is the microprudential bank supervisor, or to a dedicated inter-agency committee which comprises central bank officials, supervisors and government representatives. ⁵⁸

In the EU framework, the ECB is responsible under the SSM Regulation for assessing macroprudential measures adopted by the national authorities in the Member States participating in the Banking Union. If deemed necessary to address risks to financial stability, the ECB has the power to apply more stringent measures than those adopted nationally. ⁵⁹ Furthermore, it will be recalled that the ESRB was established in 2010 as part of the European System of Financial Supervision. ⁶⁰ It is an independent body responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. In pursuit of its mandate, the ESRB monitors and assesses systemic risk and issues, where appropriate, warnings and recommendations. ⁶¹ The ESRB has its seat in Frankfurt am Main and is chaired by the President of the ECB. The ECB is further responsible for carrying out various tasks regarding the ESRB's functioning, such as providing analytical, statistical, logistical and administrative support. ⁶²

Daniel Segoin looks at the instruments at the ECB's disposal in the field of macroprudential supervision. He argues that the absence of a clear definition of ‘macroprudential risks’ complicates the delineation of competences between the EU and national authorities. This is particularly important for the ECB, because it is more of a ‘coordinator’ in the ESRB or a ‘subsidiary actor’ to national authorities in the SSM in matters related to macroprudential supervision. However, he sees the vagueness of this concept also as an asset for the competent authorities, because it gives them sufficient room for manoeuvre to design tailored responses to systemic risks or a crisis. This division of competences also has implications for the ECB's accountability, as the national authorities are in the driving seat in terms of addressing such risks. Nevertheless, as argued by the author, the ECB remains accountable for any failure to act in case of persistent macroprudential risks left unanswered by the national authorities.

This notwithstanding, it may be the case that the ECB's powers are too narrow to effectively preserve financial stability. When the ECB acts as ‘macroprudential supervisor of last resort’ in the SSM, its actions are limited to credit institutions, financial holding companies and mixed financial holding companies, to the exclusion of the shadow banking sector. Segoin proposes remedying this by amending the SSM Regulation. The ECB may also influence macroprudential matters through soft law instruments, namely the opinions it adopts in its consultative function (Article 127(4) TFEU) and the warnings and recommendations adopted by the ESRB. These instruments could also have implications for both its credibility and accountability, in case the ECB failed to spot the risks concerned. As regards democratic accountability, the author proposes giving a more formal role (e.g., in attending relevant hearings at the European Parliament) to the Vice-Chair of the ECB Supervisory Board, as their dual hat as Vice-Chair and ECB Executive Board Member gives them a unique perspective in monetary policy and banking supervision, which may be decisive in handling macroprudential risks efficiently. If the ECB's powers in this area were to be expanded, a revamped framework regarding its accountability would be warranted.

6. Conclusions

This introduction and the contributions to this special issue clearly show the evolution in the role of central banks and financial supervisors over time. More concretely, the space central banks occupy – and, in casu, the space the ECB occupies – has been enlarged. What emerges very clearly, in our view, from the contributions to this special issue is that the ECB's scope of influence has increased over the years and is perhaps set to increase further. Accordingly, this has broadened the areas of activities for which the accountability and transparency of the ECB must be ensured. ⁶³ This broader role for the ECB – whether it translates into a novel interpretation of its mandate, the creation of a new form of public money, more complex and discretionary decision-making, or the conferral of new tasks – is not without controversy. ⁶⁴ Nevertheless, we take the view that the ECB is either legally required to act, or that the Treaty text allows it to adopt the desired course of action. However, the expansion of the role and tasks of the ECB must be accompanied by robust accountability and transparency arrangements. It is rightly argued that ‘…accountability cannot be guaranteed by the fact that the initial stage of its creation [was] democratic. It is in its continuing operations and policies, in the “life” of the ESCB, that the System must be subject to democratic control.’ ⁶⁵ New powers have been conferred on the ECB over the recent years while the ECB has also made expansive use of its powers in the Treaties and interpreted its mandate so as to include additional considerations. Those options to enhance accountability, transparency and legitimacy which are compatible with the Treaties should now likewise be pursued. In other words, assuming that a Treaty revision is not immediately available, our argument is that, at the very least, those options which are available within the existing Treaty framework (on both a formal and an informal basis) should be pursued.

Different types of accountability are utilized to keep the ECB, as well as the other authorities acting in this area, in check. Whether these are adequate is a matter for debate, and the authors in this special issue have expressed a broad spectrum of opinions, depending on the subject matter addressed in their contributions. We also notice an increasing emphasis – in conferences, academic literature and the articles in this special issue – on accountability to the public. There is little doubt that the ECB will (have to) push new frontiers in the future, such as taking biodiversity loss ⁶⁶ or inequality ⁶⁷ into account, or consider new instruments in the pursuit of its target(s). ⁶⁸ It is axiomatic that an increase in an institution's powers or tasks should be matched by increased democratic controls and robust accountability mechanisms. ⁶⁹ Or, as put by Lastra and Dietz in this special issue, with expanded responsibilities and influence we need commensurate measures of accountability. This would also ensure, in our view, that the ECB and other relevant authorities (such as the ESAs and the ESRB) would go far enough in meeting their objectives. At the same time, in areas such as microprudential supervision or the pursuit of the ECB's secondary objective, the course of action chartered also depends on the actions taken and the legislation adopted by other EU institutions, all of whom must exercise their tasks effectively for the EU objectives to be achieved. The magnitude of the challenges facing the EU and its Member States that we explore in this special issue demands as much. It is also required that the EU legislator and the Member States carefully think about the implications inherent in their choice to continuously attribute new powers to the ECB. It may well be the case that the ECB is a well-functioning institution, which is readily available when new challenges arise. But the constant expansion of its tasks and duties is not without consequence, especially in terms of accountability. Hence, the EU legislator and Member States would be best advised to, on the one hand, carefully consider any future reforms (and the consequences of those that have recently been pursued) while, on the other hand, make use of the already available instruments to support the ECB and diminish its burden and to keep it in check.