The damaged ECB legitimacy

by Anne Sibert

Vox
September 15, 2011

The European Central Bank was once known for its focus on price stability. Since the global economic crisis, however, its role has extended to saving banks and sovereign countries. This column argues that such a move has badly harmed the institution’s legitimacy – something that will damage both its policy effectiveness and confidence in the governing bodies of the EU as a whole.

The ECB’s role has evolved in its decade-long existence. In this note I describe how the choices of the ECB have damaged the institution’s legitimacy. This matters because decreased legitimacy lowers the ECB’s future policy effectiveness and weakens the legitimacy of all other institutions of governance in the EU, including the European Commission, the European Court of Justice, and the European Parliament.

In evaluating the ECB’s performance, I split the last eight years into two parts:

• The benign period up until August 2007 when the institution was focused on price stability; and

• The period after when the ECB was called upon to help contain the liquidity crisis and, within its powers as a central bank, to mitigate the banking sector insolvency and sovereign debt crises.

Prior to August 2007 the ECB produced stable and only slightly above-target inflation. However, it lacked procedural transparency. The Treaty makes it clear that it was intended that members of the Governing Council should vote. An astonishing 834 words are devoted to describing exactly how the voting mechanism is to work. Unfortunately, in comparison to other central banks that are supposed to make decisions by majority rule, such as the central banks of Japan, Sweden, the UK, and the US, the ECB is opaque about how its policy rate decisions are reached. It does not reveal the vote or publish minutes. When questioned by the press or the European Parliament about the lack of procedural transparency, ECB President Trichet’s stock response has been to view transparency as being equivalent to explaining one’s decisions ex post and to extoll the virtue of the ECB in this regard.

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