Don't mess with me

How the ECB built its independence into a fortress

ECB Drahgi-01
On the defensive. Source: Handelsblatt Global, Vecteezy

The European Central Bank is condemned to being criticized. It’s a fact of life for the bank that sets a single interest rate for economies as diverse as Germany and Greece. Whatever it does, someone’s going to be unhappy.

Politicians in Germany, in particular, are keen to knock the bank. Its ultra-low interest rates rob German savers of their hard-earned retirement provisions, the disparagers complain, ignoring how this policy saves their government billions in interest on debt repayments.

When the ECB moved into its imposing Frankfurt headquarters in March 2015, demonstrators fought a pitched battle with police, setting fire to cars and trash containers. They blamed the bank for the economic woes afflicting Europe, even though it was the ECB’s president, Mario Draghi, who put the lid on the debt crisis by famously declaring he would do “whatever it takes” to protect the euro.

The ECB tends to rebuff criticism in all areas, not just in its core task of setting monetary policy.

The European Central Bank celebrates its 20th birthday on June 1. That’s two decades of criticism and second-guessing from all corners of Europe, from know-it-all politicians, bankers and economists trying to tell it what to do.

So it’s no surprise that in those two decades, the bank adopted a fortress mentality. It jealously guards its independence, its greatest asset and the pillar of its power. Defiant and majestic, its €1.3 billion ($1.6 billion) building with soaring twin towers in Germany’s financial capital make the Federal Reserve’s drab headquarters in Washington look positively modest. The message is unmistakable: Don’t mess with us.

But the ECB’s tendency to rebuff criticism in all areas, not just in its core task of setting monetary policy, risks undermining its legitimacy. When Emily O’Reilly, a European official who investigates complaints about maladministration in EU institutions, voiced criticism of Mr. Draghi’s membership in the G30 (an international financial forum of bankers and central bankers), Mr. Draghi didn’t answer for weeks. He then refused to quit.

Ms. O’Reilly had a point: If regulators and the people they regulate rub shoulders, conflicts of interest can result. To Mr. Draghi, membership of the G30 isn’t essential. It was the principle: The central bank doesn’t like being told what to do.

Exterior view of the headquarters of the European Central Bank (ECB) in Frankfurt. In the foreground Gravity and Groth from Guiseppe Penone.
Raise the drawbridge! Source: Getty

“The ECB’s independence is so far-reaching that we’re completely reliant on internal ECB mechanisms for detecting and removing conflicts of interest, insider trade and things like that,” said Leo Hoffmann-Axthelm, an expert on EU institutions at Transparency International, an anti-corruption watchdog.

As things stand, the ECB is subject to precious little oversight, either from parliaments or outside auditors. When the European Court of Auditors, the EU’s investigatory audit agency, attempted to look into the ECB’s banking supervisory activities last year, the central bank simply refused to hand over certain documents. When Latvia’s central bank governor, Ilmars Rimsevics, was prevented from attending ECB meetings due to a bribery probe, the ECB appealed to Europe’s highest court, saying it wanted to clarify the legal position.

The sense that the ECB is beyond anyone’s control is reinforced by its labor rules. It has its own trade union and employee board, but they’re toothless when compared with staff bodies in German companies and at the Bundesbank, the German central bank. As a result, some ECB staff have been on rolling temporary contracts for over a decade.

“The political independence of the ECB isn’t carte blanche for it or its representatives to do whatever they please.”

Markus Ferber, member of European Parliament for Germany's CSU

Ultimately, the bank’s autonomy hinges on whether the public accepts it. And that acceptance could wane if the ECB refuses to stick to prevailing codes of conduct in areas not linked to its main job of monetary policy, or if it makes mistakes due to a lack of proper oversight. “The political independence of the ECB isn’t carte blanche for it or its representatives to do whatever they please,” said Markus Ferber, a member of the European Parliament for Germany’s conservative CSU party.

The ECB must be concerned that if the bank makes concessions in one area, pressure may mount for it to give way elsewhere. Maybe the pressure will ease when it raises interest rates, or when a German takes the helm. Current Bundesbank President Jens Weidmann, a vocal critic of the ECB’s quantitative easing, is tipped as a possible successor to Mr. Draghi in 2019.

But given that ECB’s job is squaring circles, hopes that its job will get any easier are probably wishful thinking.

Jan Mallien and Frank Wiebe cover monetary policy for Handelsblatt in Frankfurt. Jeremy Gray, an editor at Handelsblatt Global, contributed to this story, while David Crossland adapted it into English. To contact the authors: mallien@handelsblatt.com, wiebe@handelsblatt.com 

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