The European Central Bank is undergoing a changing of the guard: a new president, a new chief economist, and two new executive board members. And the ECB’s new leadership is facing a contentious year in 2020.
For starters, former ECB president Mario Draghi’s last policy meeting was marked by disputes over quantitative easing and the president’s role in decision-making, underscoring disagreement within the governing council (comprising the executive board and national central bank governors) about monetary strategy. Should the ECB retain its point target for inflation but make that target symmetrical, in contrast to the present “below but close to 2%”? Or should it abandon all hope of coming close to 2% and settle for 1.5%?
Then there is the assertion by Draghi’s successor, Christine Lagarde, that the ECB should focus on the climate emergency, even though the issue is not part of the central bank’s mandate (and even though monetary policy is not an obvious instrument for tackling it).
It is timely, therefore, that the ECB has launched a comprehensive review of its policy strategy. Frank discussion of alternatives, buttressed by systematic staff analysis, can only help. But while pondering alternatives is all well and good, the idea that a strategic review should produce a consensus on targets, instruments, and strategies is misguided. Even well-informed people can disagree about the nuances of policy, because, as often happens, they weight different variables differently. Consensus can reflect groupthink, and groupthink can cause policy committees, which are strengthened by a diversity of views, to overlook important risks.
The question is how to manage disagreements. The status quo, whereby the president holds a press conference and presents the policy decision as a consensus, after which one or more governing council members may issue a dissenting statement, makes everyone look silly. It undermines the legitimacy of policy, because the ECB provides only partial and conflicting information about decision-makers’ views and the rationales underlying them.
Recently, Ignazio Visco, the governor of the Bank of Italy, proposed that the governing council should vote on consequential decisions and announce the results. The Fed, the Bank of England, the Bank of Japan and the Sveriges Riksbank, among others, already do so. Dissent, when it occurs, shows that policymakers are engaged in a healthy exchange of ideas. When their votes are announced, they feel pressure to explain why they have chosen to side with the majority or dissent from it.
Central bank independence is tenable only when policymakers are accountable for their actions. And they will be accountable only if they are compelled to defend their decisions in the court of public opinion. If transparency is essential for accountability, then the release of votes, together with minutes – and, with a delay, transcripts – is the ultimate form of transparency. Today, with central bank independence under threat, it is all the more essential.
Moreover, announcing votes has other advantages. It helps to signal future monetary policy. In other words, it acts as a sort of forward guidance, which is an essential tool in a low-interest-rate environment. Votes are also a source of information about policymakers’ macroeconomic outlook, which is helpful for investors.
The argument against releasing votes is that the ECB’s governing council is numerically dominated by central bank governors who are appointed nationally, and who thus will feel pressure to support policies that are in the national interest, rather than that of the eurozone. This is different from the situation of other central banks. In the US, reserve bank presidents are selected by directors residing in their districts. But some of those directors are appointed by the federal reserve board – that is to say, nationally. Since the enactment of the Banking Act of 1935, which reformed the Fed, it has been understood that members of the federal open market committee vote with the interests of the entire US economy, not their home region, in mind.
Evidently, this is not the attitude of Europe’s national leaders, who worry that ECB policy affects different countries differently. Were their votes released, governing council members would be more likely to cater to narrow national priorities. Otherwise, they would risk replacement by more pliable lackeys.
Such cynicism underestimates Europe’s central bankers. They may have made mistakes, but they have not shown a readiness to bend to popular opinion in order to retain their jobs. As important as their vote, moreover, is their ability to convince their colleagues of the validity and integrity of their arguments. Blindly obedient central bankers who lack this integrity will be unable to persuade their colleagues. They will find themselves isolated and consistently in the minority.
Voting, it is said, is a duty in a democracy. Unlike in democratic elections, however, those who set the ECB’s monetary policy should not only vote, but also reveal how they cast their ballots.
• Barry Eichengreen is professor of economics at the University of California, Berkeley, and a former senior policy adviser at the IMF.