Abstract
The role of the European Central Bank (ECB) has expanded substantially in recent years due to subsequent crises. As a result, its accountability has been a matter of growing concern. This paper focuses on recent monetary policy decisions (specifically, the 2020–21 monetary policy strategy review and the Transmission Protection Instrument) and the evolving accountability practices of the ECB. After discussing three relevant key dimensions of central bank design (independence, discretion and accountability) and their relationship over time, the article shows that the highlighted recent developments will lead to a much greater degree of discretion on the part of the ECB, and that accountability practices have not evolved in a commensurate manner. The article concludes by making specific proposals to improve, to some degree, the accountability of the ECB to the European Parliament, and address the current imbalance between independence, discretion and accountability.
Introduction
The creation of the European System of Central Banks (ESCB) and the European Central Bank (ECB) with the Maastricht Treaty presented a new mode of democratic accountability in the European Union (EU) institutional framework, the so-called ‘accountable independence’. 1 The institutional design of the ECB, including accountability arrangements and the legitimacy it enjoys when conducting monetary policy, has been subject to intense debate since the beginning. 2 The Bank's legitimacy to conduct monetary policy includes three dimensions: (i) ‘input legitimacy’, achieved initially with the ratification of the Maastricht Treaty, and subsequently with successive appointments of Executive Board and Governing Council members, (ii) ‘output legitimacy’ when successfully attaining defined objectives, and (iii) as a form of ‘throughput legitimacy’, continuous accountability to justify to the European citizens and their elected representatives ‘how [the ECB] uses the powers and prerogatives with which it has been entrusted to pursue its objectives’. 3
Up to the global financial crisis (GFC), ‘output legitimacy’ was possibly sufficient because the ECB had largely achieved price stability by using conventional instruments (interest rate policy) with limited distributional and other side effects. The GFC and European sovereign debt crisis brought new challenges related to monetary policy objectives and instruments, with the key tenets of the pre-GFC balance between independence and accountability coming into question. 4 Fundamental changes to the central banking model exposed even further the weak accountability framework elaborated in the Maastricht Treaty. 5 Central banks worldwide emerged from the crisis with new roles (financial stability, micro- and macro-prudential supervision) and new (non-standard) monetary policy instruments. What is unique in the ECB's case is that it also assumed a controversial crisis management role (with the participation in the so-called ‘Troika’, but also increasingly having to offset shortcomings on the fiscal side of the Economic and Monetary Union (EMU) through its monetary policy). This was a catalyst for a discussion about the appropriateness of the ECB's accountability framework.
The debate on ECB accountability is now once again reinvigorated. 6 This renewed interest can be traced back to three main factors. First, post-GFC, central banks were forced, due to the low-inflation environment and constraints of the effective lower bound on their traditional monetary policy instrument (short-term interest rates), to resort to non-standard instruments over a prolonged period of time. In the euro area context, this has led to significant discussions and disputes about the legality, effectiveness and side effects of these instruments. Then, in response to the pandemic crisis, the ECB used non-standard instruments at a yet unprecedented scale, expanding the balance sheet to new peaks. Apart from the scale of monetary accommodation, the COVID-19 policy response was also characterized by considerable flexibility. For instance, the pandemic emergency purchase programme (PEPP) allowed for temporary deviations from the capital key allocations, including also a waiver of eligibility requirements for purchasing Greek government bonds. At the time when the ECB had to start forcefully normalizing its monetary policy due to high inflation, the new – and so far unused – Transmission Protection Instrument (TPI) was announced, allowing for selective purchases of government bonds. 7
Second, in recent years, the Governing Council has decided to take a more open approach to the interpretation of the so-called ‘secondary objectives’ of the ECB. Article 127(1) Treaty on the Functioning of the EU (TFEU) states that the ESCB ‘shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union’. In the early years of the common currency, the ECB took a more cautious approach. The first iteration of the ECB's monetary policy strategy made clear that it would ‘focus strictly’ on price stability as its primary mandate. 8 Indeed, as articulated in an internal ECB document from 2002, it was considered that the ECB should not actively pursue its secondary objectives. 9 Recently, however, there has been a clear shift in the ECB's thinking, in particular with respect to its role in supporting climate change policies. 10 The 2020–21 monetary policy strategy review resulted in the incorporation of climate change considerations in the ECB's monetary policy framework. 11
Third, the inflationary pressure that started building up in 2021 led gradually to double-digit inflation for the first time in the history of the euro area. The ECB was suddenly facing the most serious test to its commitment to price stability, with simultaneous risks of recession and financial instability. High inflation, on the one hand, and side effects of rapid monetary policy normalization, on the other, meant that the ECB was, once again, thrust to the centre of public, political and financial markets’ attention.
The role of the ECB has continued to evolve. This article shows, with some examples, how the latest developments in monetary policy have affected central elements of the bank's institutional design in recent years. It begins by discussing the evolving accountability practices of the ECB since the euro area crisis (section 2). It then seeks to place accountability in its more general institutional context by providing a brief overview of the three relevant key dimensions of central bank design (independence, discretion and accountability) and their relationship over time (section 3). Sections 4 and 5 focus on recent monetary policy decisions (specifically, the 2020–21 monetary policy strategy review and the Transmission Protection Instrument) to show that these developments led to a greater degree of discretion on the part of the ECB, and that accountability practices have not evolved in a commensurate manner. Section 6 of the paper contains specific proposals to address, to some degree, the imbalance between independence, discretion and accountability. Section 7 concludes.
Evolution of accountability practices
Accountability has been defined as ‘a relationship between an actor and a forum, in which the actor has an obligation to explain and to justify his or her conduct, the forum can pose questions and pass judgment and the actor may face consequences’. 12 In a broad context, the ECB's accountability framework evolved in a ‘functional’ manner. 13 New central bank functions have been followed by new channels of accountability, in line with the separation of these respective functions at the ECB. For example, the ECB's new banking supervision responsibilities were established under the Single Supervisory Mechanism (SSM) Regulation adopted in October 2013; 14 the Regulation included detailed provisions on accountability and additionally required the ECB and European Parliament (EP) to agree on practical modalities of accountability. 15 Soon after, an interinstitutional agreement (IIA) was adopted by the two institutions. 16 As regards macroprudential supervision, the European Systemic Risk Board (ESRB) was established in 2010 with the task of macroprudential oversight of the EU's financial system; 17 the ESRB is formally separate from the ECB but with strong organizational links. 18 The President of the ECB is also the Chair of the ESRB. Similar to the SSM, the accountability arrangements of the ESRB were defined in secondary legislation. 19 Finally, concerning the ECB's role in macroeconomic adjustment programmes, under the enhanced surveillance process, the EP (and national parliaments) may invite ECB (along with Commission and International Monetary Fund) representatives to participate in an ‘economic dialogue’. 20 In all these cases, the accountability provisions were defined in secondary legislation.
Conversely, in the area of monetary policy, which is the focus of this paper, the ECB's accountability framework is defined at Treaty level. This means that any formal revision of the framework is only possible through a politically cumbersome and unlikely process of Treaty change. The accountability arrangements have not, however, remained static because of this. Current accountability practices include:
The intensification in the interaction between the EP and the ECB in the period after the GFC and the emergence of new accountability practices that go beyond the statutory requirements of the Treaty have been documented.
23
In 2023, the two institutions have further formalized the existing accountability practices through an exchange of letters.
24
Even after these upgrades, the question remains whether the accountability framework is sufficiently developed to ensure an appropriate degree of parliamentary scrutiny. This article argues, taking into account recent developments such as the 2020–21 monetary policy strategy review and the TPI, that this is not the case. Before discussing these recent developments, the next section discusses the relationship between central bank independence, discretion and accountability – the three elements at the heart of the evolving institutional setting in which the ECB conducts monetary policy.
Relationship and tensions between independence, discretion and accountability
The discussion on central bank legitimacy and accountability is typically framed around the independence-accountability dichotomy. 25 Yet for the purposes of our discussion and in order to better understand the complex institutional landscape of post-GFC monetary policy, we will distinguish between, and consider, three key elements – independence (in its different facets, as we shall see below), discretion and accountability – as well as the tensions underlying this trichotomy. Distinguishing between these three dimensions will help us better understand what exactly is new about recent developments in monetary policy, and how they affect the institutional balance and the role of the ECB. We start by discussing each concept briefly, before using them in our analysis of recent developments in the following sections.
First, independence is used in the legal literature to mean, generally, freedom from political pressure, and it is seen as an institutional design feature that is necessary to achieve price stability. 26 We refer to this aspect of independence as ‘institutional’, and it is enshrined in primary EU law in Article 130 TFEU. This institutional independence is nowadays seen as an essential and non-negotiable feature of modern central banks, although we find different degrees of it in different implementations across the world. 27 Independence is also used with a related but distinct meaning: the independence of monetary policy from fiscal dominance, or the idea that monetary policy should not be used to make up for mistakes of economic and fiscal policy. 28 The concern here is about the use of monetary policy to the wrong ends, whether or not this is the result of political influence. We call this ‘substantive independence’, to distinguish it from ‘institutional independence’, above. 29 This concept and its distinction from institutional independence is particularly relevant in the EMU setting for at least two reasons. Firstly, by design, a currency area that has one monetary authority and twenty separate fiscal authorities is susceptible to a type of risk that may ultimately put the former (the ECB) in a position to act as an ‘existential guarantor’ of the EMU. 30 Secondly and relatedly, in that institutional setting, national considerations are more likely to make their way into the decision-making structures of the ECB. 31 Substantive independence of the central bank is thus defined not only by the legal framework related to monetary policy, but also by the wider framework of the EMU, in particular concerning fiscal policy. From that perspective, there is a link between this form of substantive independence and discretion. If policymakers involved, both on the side of the central bank and the governments, share an implicit understanding that the ECB can, if necessary, wield its wide discretionary powers to alleviate/correct the pressures/failures on the fiscal side, then substantive independence is under threat.
Second, discretion refers to an institution's latitude of choice when making decisions and conducting policy. When talking about the ECB, in particular, this includes two different aspects: on the one hand, the ECB has been afforded a great deal of latitude in the interpretation of its mandate (e.g., the authority to self-define the price stability objective, the ambiguity of its secondary mandate). This can be referred to as ‘legal discretion’, provided in the Treaty. Legal discretion is necessary for the central bank's institutional independence and allows it to adjust its policy without requiring amendments to the Treaty. It needs to be balanced and proportionate, however, to avoid excessive legal ambiguity. On the other hand, the ECB – as other central banks around the world – has a great deal of ‘operational discretion’, 32 or freedom in choosing how to react to economic shocks and changes in the environment in which it operates. In other words, the ECB decides to what extent and in which way it will use the wide legal discretion provided in the Treaty (or how it will operationalize it). The discussion on operational discretion also relates to the long-standing economic debate on rules versus discretion in monetary policy. 33 A high degree of discretion in this context means a lack of predictability or restriction in a central bank's policy response, i.e., a more complex and vague reaction function to economic and financial market developments. On the one hand, operational discretion is needed because rigid monetary policy rules lack the flexibility needed to respond to certain unexpected developments, in particular financial instability. On the other hand, the argument goes, constraining operational discretion is key to ensure the central bank's long-run, time-consistent focus on price stability, 34 to make sure discretionary monetary policy is not used to pursue short-term economic goals. In other words, constraints on operational discretion are needed to ensure substantive independence, as discussed above.
Indeed, a certain degree of discretion, both legal and operational, is necessary to ensure the effectiveness of monetary policy, as well as institutional independence. But completely unconstrained discretion may endanger substantive independence, as the central bank could use its discretion to pursue short-term economic goals instead of the agreed-upon goals of monetary policy. This is especially relevant if the central bank has multiple mandates or roles. What emerged from this tension was a framework that former Fed Chairman Ben Bernanke described as ‘constrained discretion’. 35 Central banks are firmly committed to medium-term price stability, while being able to conduct macroeconomic and financial stabilization in the short term as long as inflation is low and stable; the primacy of the price stability objective is one of the main constraints imposed on central bank discretion. 36 There are, of course, further constraints on the ECB's discretion, such as the Treaty prohibition on monetary financing (Article 123 TFEU) – also necessary to preserve independence – and the need to comply with other requirements of the EU legal system. Compliance with these constraints is ensured through accountability, in a broad sense (democratic and judicial).
In this monetary policy regime, there is a risk of conflating independence and discretion because both concepts are, of course, closely connected. Discretion is a means to an end: one of those ends is independence, and the other is the effectiveness of monetary policy, i.e., ensuring that the objectives of monetary policy can be achieved, even in the face of market tensions and pressures. As discussed, however, complete or unconstrained discretion may endanger the substantive independence of monetary policy; hence the compromise of ‘constrained discretion’. Overall, the ECB is the most independent among its central bank peers, and also the one with the broadest discretionary power. 37 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. Throughout the succession of crises, starting with the GFC, policy innovation by the ECB is considered to have been key not only in the pursuit of its objectives, 38 but also for preserving the integrity of EMU. 39 Such policy innovations and use of discretion were, however, met with significant legal challenges, as some considered that the ECB had crossed the legal limits of its discretionary power. These challenges – brought before the German Federal Constitutional Court (GFCC) – resulted in an animated dialogue (and, at times, conflict) between the latter and the Court of Justice of the EU (CJEU). 40 In general, the GFCC has shown itself to be wary of the ECB's expanding role, 41 while the CJEU has taken a more positive view of it, allowing the ECB a very substantial degree of discretion. 42
Finally, the trichotomy is complete with the concept of accountability – already defined in section 2, where we also explored its weak Treaty foundations in the context of the ECB's institutional setting. While it is possible to conceive of accountability in a broader sense, this article focuses on democratic (and, in particular, parliamentary) accountability. It is clear that all three elements of this trichotomy (independence, discretion and accountability) are necessary for the conduct of monetary policy and the proper operation of a modern central bank. As the previous discussion shows, while institutional independence is essential within this framework, discretion was always supposed to be constrained – both in order to ensure the substantive independence of monetary policy from economic policy, and its effectiveness. Accountability is thus a necessary check on the ECB's discretion, a constant probe on how the central bank is using its discretion, and a necessary buttress for independence. Accordingly, the ideal accountability requirements are able to fulfil this function without posing a threat to institutional independence.
Different balances between these three elements have been struck in different institutional and legal systems around the world. When it comes to the euro area, the difficulty of striking this balance is compounded by the unique context in which the ECB operates. The distinctive institutional setting of EMU means that the ECB is a supranational central bank that operates in an incomplete and imperfect monetary union. It is thus a ‘disembedded’ central bank that operates outside the usual institutional structures, and is not subject to certain traditional feedback loops that exist in a national setting. It also faces a wide range of public opinions and national economic and political contexts. One could argue that the ECB needs to be relatively more independent and operate with more discretionary power than its central bank peers; nevertheless, an appropriate balance still 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 is an evolving one; it has changed over time, as the ECB exercised a greater degree of discretion since the euro area crisis. While accountability practices have also evolved (see section 2), they have not kept up. Analysing recent monetary policy developments allows us to consider the direction in which the relationship continues to evolve. The article argues that several decisions in the recent period have resulted in further expansion of operational discretion in monetary policymaking at the level of the ECB's Governing Council. The following sections provide examples (namely, the 2020–21 monetary policy strategy review and the Transmission Protection Instrument created in 2022) and explore their implications for the independence-discretion-accountability relationship.
2020–2021 monetary policy strategy review
The 2020–2021 monetary policy strategy review marks an important benchmark for the ECB, 43 as a formal (and perhaps overdue) update of its analytical and decision-making framework. It should be noted that the monetary policy strategy is not binding on the ECB in a legal sense and it evolves over time. However, as a formal expression of the ECB's price stability objective and how it will strive to achieve it, the strategy represents the most important yardstick for evaluation and accountability of monetary policy. By choosing a certain degree of clarity and precision in the formulation of the strategy, the ECB can, to a certain extent, effectively tilt the balance between (substantive) independence, discretion and accountability.
The outcome of the 2020–2021 review has been significant in many respects. Looking through the lens of the independence-discretion-accountability relationship described in the previous section, four specific elements stand out. The analysis shows a clear trend towards increasing operational discretion in monetary policymaking, not complemented yet by an increase in accountability. 44
A. Numerical definition of the inflation target
The ECB's Governing Council has the discretion to provide the precise definition of price stability. From the onset, however, there has been a contentious ambiguity in the numerical definition of the ECB's inflation target. In 1998, the Governing Council decided that price stability shall be interpreted by the ECB ‘as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.’ 45 In 2003, the ambiguous ‘below 2%’ formulation was modified, adding little clarification, to: ‘below, but close to 2%.’ 46 This long-standing vagueness at the heart of ECB's primary objective led to unwarranted discretion and hindered effective accountability. 47 The 2020–21 strategy review finally addressed this shortcoming: a clear 2% inflation target was announced, leading to an important improvement of accountability by removing the ambiguity and discretion associated with the previous formulation.
B. Symmetric nature of the inflation target
The 2003 ‘below, but close to 2%’ formulation implied that the target was asymmetric and, in the ECB's view, contributed to the low-inflation environment of the preceding years by insufficiently anchoring inflation expectations around the target. 48 To address this, the Governing Council clarified that the target was symmetric, meaning that ‘negative and positive deviations from this target as equally undesirable’. 49 The lack of precision, however, on how the symmetry will be implemented (e.g., tolerance bands, horizon used as reference etc.) meant that accountability gains from the clear 2% target were largely cancelled out. Symmetry seems to have been de facto implemented already before the review. 50 Nevertheless, its formalization reflects a choice that has implications for accountability.
C. Flexibility of the medium-term horizon
Monetary policy aims to achieve price stability over the medium-term horizon in order to appropriately take account of the long and uncertain lags with which it affects economic variables, and to remove the impulse to overreact to temporary/short-term fluctuations in inflation. According to the 2003 strategy, adjusting the length of the medium-term orientation was, in theory, reserved for aggregate supply shocks. 51 The 2020–2021 strategy review redefines flexibility to extend the medium-term horizon in order to ‘cater for other considerations relevant for the pursuit of price stability’. Three such ‘considerations’ were mentioned: employment, financial stability and proportionality assessments.
D. ‘Integrated analytical framework’ and assessments of proportionality and side effects of monetary policy
The 2003 strategy defined a two-pillar framework: the ‘economic analysis’ and ‘monetary analysis’. 52 As part of the 2020–2021 strategy review, the latter was revamped and expanded into a ‘monetary and financial analysis’ to include the monetary transmission mechanism, evaluation of financial vulnerabilities and imbalances, and effectiveness of macroprudential measures to address financial stability risks. 53 This effectively recognized financial stability ‘as a pre-condition for price stability’. 54 The result is that inputs that go into the Governing Council's monetary policy decisions became more complex and practically impossible to scrutinize from the outside. Whereas the previous ‘monetary analysis’ focused on monetary aggregates and was in any case eventually downgraded to ‘cross-checking’, the new ‘monetary and financial analysis’ rests on a complex and evolving relationship between price stability and financial stability, the very definition of which is not clear-cut.
In the 2003 statement and the related 337-page document with background studies, the word ‘proportionality’ was not mentioned once. 55 Having gained prominence after recent legal challenges, 56 the assessment of proportionality and side effects now occupies an integral part of the new monetary policy statement. 57 Without a clear understanding of how these assessments are undertaken and what their outcome is, effective accountability of monetary policy becomes difficult to achieve.
Overall, it is fair to say that the strategy review led to a notable expansion of discretionary power at the level of the Governing Council. On the one hand, this provides the ECB with greater adaptability when facing future challenges and trade-offs. On the other hand, monetary policy decisions and inputs that go into them have become more complex and opaque, hindering accountability and public scrutiny of monetary policy.
Transmission protection instrument
In July 2022, almost 10 years to the day since Mario Draghi's ‘whatever it takes’ statement, 58 the ECB unveiled its new Transmission Protection Instrument (TPI). This tool will allow for the purchase of secondary-market securities issued in euro area countries ‘experiencing a deterioration in financing conditions not warranted by country-specific fundamentals’ in order ‘to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area’. 59 There are cumulative criteria to ensure that the countries where these purchases are being conducted pursue sound fiscal and macroeconomic policies, including: compliance with EU fiscal rules; absence of severe macroeconomic imbalances; satisfactory fiscal sustainability analyses conducted by the European Commission, the European Stability Mechanism (ESM), the ECB itself and others; and compliance with macroeconomic commitments made in the context of the Recovery and Resilience Facility (RRF) and the Commission's country-specific recommendations under the European Semester. There has been a clear effort to ground the use of this tool on the EU's mechanisms of fiscal and economic governance, and thus on countries’ compliance with EU fiscal and macroeconomic rules as assessed by the Commission and the Council, and a move away from linking this new instrument to ESM conditionality, as was the case with the Outright Monetary Transactions (OMT) programme. 60
The TPI intertwines monetary and fiscal policy in a different manner than the OMT did, and its final effects on discretion, independence and accountability remain to be seen. But there are elements in its design that are likely to be highly significant in this context. Firstly, the purpose of this tool is to allow the ECB to react to ‘unwarranted market dynamics’, and the Bank has considerable latitude in interpreting this vague term. Secondly, it has been mentioned above that the OMT included economic and fiscal conditionality to preserve monetary policy independence, i.e., to make sure that monetary policy is not bound to certain causes of action simply because of bad fiscal and economic policy decisions. The TPI, however, has done away with this conditionality, and gives the ECB significant leeway in its decisions, which may involve making its own economic/fiscal policy assessments. The design of the TPI has sought to assuage these concerns by ‘delegating’ these political judgments, i.e., by relying on the assessments conducted by political institutions (the Commission and the Council) in the context of fiscal and economic coordination. Note, however, that the ECB is not bound by these assessments, and they will merely provide input into the Bank's final decision.
Overall, the effects of the TPI on discretion are clear, while its effects on independence are more complex and will depend on the way in which the ECB uses this tool. 61 In relation to independence, the TPI could have a bearing on the substantive independence of monetary policy; this will depend on whether the ECB uses the TPI purely to pursue price stability, or whether it uses its discretion in this context to manage trade-offs between price stability and public debt sustainability – in which case, there may be a negative effect on the substantive independence of monetary policy, which would be made subject to fiscal policy (on a different note, this would also raise again, or further complicate, issues of competence). 62 Technically, the TPI does not impinge on the ECB's institutional independence to the extent that the Bank is not bound by assessments provided by other institutions in the context of economic and fiscal integration. It is safe to say, at any rate, that the TPI increases the operational discretion of the ECB to a large degree, as the Bank will have the final decision on what justifies the use of the TPI, and it has the power to make its own assessments involving matters of economic and fiscal policy. The ECB may choose to temper this, however, by relying voluntarily on the economic and fiscal assessments of other institutions. The Bank will also be called to exercise discretion in other ways: for example, the relationship between the TPI and the OMT is not fully clear, and neither are the conditions in which one or the other should be used.
Some proposals to address the imbalance
The balance between three essential elements of central bank design – independence, discretion and accountability – can be struck in different ways and, importantly, it continues to change over time. This is especially so in the context of the EMU, an area that has seen very rapid and significant change in the past years, and that is likely to continue to evolve in the future. The previous discussion has shown that recent developments in monetary policy (the ECB's latest strategic review of monetary policy, and the recent TPI) are likely to have a particular effect on this balance, namely a significant increase in the degree of discretion of the ECB without increasing accountability (and, in the case of the TPI, a more nuanced and contingent effect on independence). Of these three elements, it has long been accountability that has stood on weakest grounds, even taking into consideration new practices adopted in the wake of the euro area crisis. Recent monetary policy decisions show that this trend persists.
Major policy decisions should be accompanied by an analysis on their impact on the balance between independence, discretion and accountability. In particular, the distinction between independence and discretion is fruitful in this discussion: while institutional independence is essential, discretion was always supposed to be constrained – both in order to ensure the substantive independence of monetary policy from economic policy, and its effectiveness. Accountability is a necessary check on the ECB's discretion, and both need to evolve in a commensurate manner. Given the growth of the ECB's discretionary power in recent years, it would be appropriate to reform and strengthen the accountability arrangements. This, we contend, is possible to do without endangering the institutional independence of the ECB.
The relative weakness of accountability seems unavoidable in this context, but it may be possible to improve matters to a limited degree through new, creative institutional practices. Before making some brief suggestions, we would like to raise two general points: the first one is that this article has focused on democratic accountability to the EP, and so will the proposals below; but our broader view of the accountability of the ECB should include the important role played by courts. 63 Indeed, in the context of the growing discretion of the ECB since the euro area crisis, the dialogue between the GFCC and the CJEU has been significant in raising awareness and discussion of the ECB's actions. Regardless of whether one tends to agree more with one court or the other – and while acknowledging the broader negative effects of such a high-profile disagreement for the EU legal system as a whole – this dialogue has had at least a positive effect on the accountability, broadly defined, of the ECB.
The second general point is that any reform or change in institutional practice in order to improve accountability should aim at tempering the ECB's degree of discretion without affecting its independence or the effectiveness of monetary policy. More specifically, any attempts to address the current imbalance must not: (i) hinder the ECB's independence, and/or (ii) obstruct the ECB's ability to achieve its objectives in a wide range of circumstances, i.e., a certain degree of discretion is a necessity. On the other hand, in order to meaningfully improve accountability, arrangements between the central bank and parliament must: (iii) be designed to continuously provide complete and unobstructed ex post information to the EP on the rationale, effectiveness and side effects of monetary policy decisions, (iv) take into account the information asymmetry between the two institutions and (v) be subject to an automatic revision when there are substantive changes to the monetary policy framework.
Having these conditions in mind, several options could be devised. This section will focus on three specific ones: non-public information disclosure, strengthened self-evaluation and independent evaluation, and automatic revision of accountability practices as part of every monetary policy strategy review.
A. Non-public information disclosure regime
The ECB's decision on public access to documents defines the reasons why it may refuse access, e.g., protection of public interest, privacy and integrity of the individual, and the confidentiality of information that is protected as such under EU law, unless there is an ‘overriding public interest in disclosure’. 64 The same overriding interest is cited for documents ‘containing opinions for internal use as part of deliberations and preliminary consultations within the ECB or with NCBs’. The ECB's rules of procedure further specify how the institution deals with confidentiality and access to documents. 65 These provisions define the Governing Council's discretion in granting/refusing access to documents to the public at large. 66 It is, however, questionable whether the same reasoning should apply to elected parliamentarians tasked with scrutinizing the ECB's conduct of monetary policy. More complex and obscured monetary policy requires more sophisticated accountability arrangements. The framework of the SSM provides a precedent in this respect. The modalities on access to information and provisions on professional secrecy contained in the IIA illustrate how such arrangements could be conceived in the area of monetary policy, while remaining within the confines of the existing Treaties. 67
It is also interesting to note in this regard the ECB's follow-up to the GFCC Weiss decision, 68 concerning the proportionality of the PSPP programme. In response to a request from the President of the Bundesbank, the ECB's Governing Council decided to authorize the disclosure of non-public documents to the German Federal Government and the Bundestag that showed how the ECB had assessed the proportionality of the PSPP. In an act without precedent, a Member State government and parliament thus gained access (indirectly) to confidential ECB documents related to monetary policy, which is centralized at the supranational/euro area level. Subsequently, in October 2020, a complainant requested the European Ombudsman to review the ECB's decision to refuse public access to documents delivered to the German authorities following the GFCC judgment. 69 The Ombudsman found that the ECB's refusal to grant public access was justified. 70
By granting confidential access to non-public monetary policy information to a national government and parliament and, at the same time, refusing public access to the same documents, the ECB effectively created a new category of non-public information that could in principle be shared with legislators to help them understand the rationale and proportionality of monetary policy decisions. Indeed, at the time, the ECB's decision to disclose confidential documents to German authorities was made ‘in the spirit of European cooperation’. 71 This example suggests that democratic accountability could also be seen as an ‘overriding public interest’, one that merits a reasonable disclosure of such documents to the EP, under strict confidentiality arrangements and perhaps with certain additional safeguards to conform to independence requirements. 72
B. Strengthened self-evaluation and independent evaluation of monetary policy
The increasing complexity of monetary policy calls for continuous evaluation of the assumptions and analysis that form the basis of decisions, as well as an evaluation of ex post effectiveness and side effects. This enables central banks to learn and adjust measures going forward, but such evaluations are also important for the purposes of accountability.
The ESCB Annual Report is seen as a key component of the Bank's accountability, as it is an opportunity for the latter to self-evaluate its performance over the past year, and then formally submit this assessment to the Parliament. Arguably, however, the effectiveness of the Report as a tool to ensure accountability could be improved. First, the Annual Report lacks an assessment of ‘target fulfilment’. 73 In other words, it should answer questions such as: Has the ECB fulfilled its target (if not, then why not)? What were the effects of the instruments employed, and what were the side effects observed?
Second, the Report should also address another issue of key importance for accountability, namely forecast accuracy. 74 Forecasts guide play a central role in monetary policy decisions and also help in anchoring expectations.
Third, reporting to Parliament could be more frequent, as we see in other jurisdictions. For example, the US Federal Reserve submits reports to Congress twice a year. The Bank of England (BoE) publishes quarterly Monetary Policy Reports, following which the Treasury Select Committee of the House of Commons takes evidence from the Governor of the BoE and other members of the Monetary Policy Committee. The Swedish Riksbank, apart from the annual report, also publishes Monetary Policy Reports five times per year. Granted, the ECB does publish its Economic Bulletin eight times a year, two weeks after each monetary policy meeting. These reports, however, are not directed specifically at the EP and they mainly provide a general ‘update on economic, financial and monetary developments’. 75 The ECB could thus increase the frequency of reporting to EP by, in addition to the existing ESCB Annual Report, upgrading the current ‘handouts’ 76 into a ‘Quarterly Monetary Policy Report to European Parliament’. The report, serving as a basis for the Monetary Dialogue, would have to be concise and provide an objective self-evaluation of monetary policy in the given quarter, with a focus on target attainment, forecast accuracy, and impact and side effects of monetary policy measures.
As a complement to strengthened self-evaluation, independent evaluation of monetary policy could be introduced. Central banks regularly publish assessments of their policies. However, concerns have been raised about objectivity. 77 Independent evaluation could address some of those concerns, and contribute to improving policy while, at the same time, providing input for more effective democratic accountability. 78 In 2014, the BoE made a pioneering move for a central bank when it established an independent evaluation office (IEO). The Parliament could be involved in, for instance, setting of the IEO's annual work programme or the selection of external peer reviewers. Following an explicit suggestion from the European Parliament to the ECB to establish an IEO, 79 the ECB's reply suggested that it is currently not ready to consider it. 80
C. Automatic revision of accountability practices as part of the monetary policy strategy review
As explained in section 4, the most recent monetary policy strategy review resulted in significant changes to the monetary policy framework, with clear implications for accountability. To link the evolution of the accountability framework to the evolution of monetary policy (and discretion in particular), the review of the former should accompany the strategy review. The exact form of the accountability review is an open question, as a formal modification of the framework through revising the Treaty is impossible at this stage. Some lighter-form arrangements between the two institutions could be used, for instance through interinstitutional agreements or simply with public exchanges of letters, as done in 2023. 81
Conclusion
This article has shown that there has been a steady increase in the ECB's operational discretion since the euro area crisis, and that this trend continues in the most recent monetary policy developments. Accountability arrangements have also evolved, but not to the same degree. As we have seen, central bank discretion needs to be constrained in the design of the monetary policy framework, and the use of discretion needs to be checked through effective accountability arrangements. Distinguishing between discretion and independence makes it clear that controlling discretion is necessary to ensure substantive independence, and that it can be done without threatening institutional independence. Democratic accountability is essential in this respect; while judicial review plays an important part in ensuring that the Bank complies with all legal requirements, its scope and intensity are limited. This article has shown that the evolving relationship between independence, discretion and democratic accountability currently appears in imbalance.
The previous section has suggested some specific reforms that could address, in part, this imbalance: non-public information disclosure, strengthened self-evaluation and independent evaluation, and automatic revision of accountability practices as part of every monetary policy strategy review going forward. 82 Importantly, these proposals would lead to an increase in accountability without posing a threat to independence. With Treaty revision out of reach in the short and medium term, these reforms could be achieved through an agreement between the ECB and the European Parliament; the recent exchange of letters may provide a template that could be extended as part of the next monetary policy strategy review in 2025. Moreover, the trend towards greater operational discretion at the hands of the ECB is set to continue in future years, e.g., as it embraces its secondary mandate more fully: all the more reason to find ways to keep accountability and discretion commensurate, without endangering the bank's independence or the effectiveness of monetary policy. Until that aim is achieved, the discussion on the legitimacy and legality of monetary policy in the euro area is bound to continue and perhaps intensify over time, including in the courts.
Acknowledgement
This paper is based on contributions made by both authors to the conference ‘The Accountability of the European Central Bank: New Frontiers, New Challenges’ at Erasmus University Rotterdam in November 2022. Both authors are grateful to the organizers of the conference, as well as to fellow panellists and audience members for comments and discussion. Additionally, Alicia Hinarejos is grateful to the Social Sciences and Humanities Research Council of Canada for its support in the course of this research (Insight Grant 2022–2026).
Footnotes
Funding
The authors disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the Social Sciences and Humanities Research Council of Canada, (grant number Insight Grant 2022-2026).
