Europe’s central bank has opportunities for communication.
The communication fostered by a central bank is a fundamental element of fiscal policy. In fact, it is an instrument of that policy.
Even those who have little interest in the central bank constantly come across statements by this or that central banker in the newspapers. Perhaps, in the end, they read the entire article because the statements of central bankers can have a significant impact on financial markets and, hence, on the savings of individual citizens.
Central banks were not always so communicative. There were times when the most important central bank in the world—the U.S. Federal Reserve Bank—didn’t even publish its decisions regarding interest rates. The rest of the world was expected to draw conclusions about fiscal policy from market reactions. Something like that can scarcely be imagined today, but it was only in 1994 that the Fed decided to promptly make public its decisions on interest rates.
“In the first case, the great challenge to the ECB was creating harmony between three characteristics of central banks which do not always mesh: they are powerful and independent, yet are not directly controlled by voters.”
The European Central Bank (ECB) was established between 1994 and 1998 at the beginning of a new era in central banking. Two developments enhanced the importance of communication at that time: the growing independence of central banks made it more imperative to communicate with the public and to give an account of their decision-making, while the effectiveness of monetary policy became increasingly dependent on managing expectations about decisions on interest rates.
In the first case, the great challenge to the ECB was creating harmony between three characteristics of central banks which do not always mesh: they are powerful and independent, yet are not directly controlled by voters. Germany was particularly successful in achieving this balance. Germans stipulated the independence of the central bank, but simultaneously limited its authority by means of a narrowly defined mandate. The terms of the mandate were not formulated by the central bank, but by the democratically elected legislature.
The model has worked because the central bank gained people’s trust by strictly following the terms of the mandate. It cultivated this trust by actively explaining both the basic tenets of its mandate and its plans for realizing them.
The founding fathers of the ECB were inspired by this example and gave the ECB a similarly clear and narrowly defined mandate oriented toward price stability. And we have built up trust by explicitly fulfilling this mandate.
The task faced by the ECB was more complex than those faced by the German Central Bank or the Federal Reserve. Earning the trust of the 335 million citizens in the Eurozone is a great challenge for our communication policy. We communicate in 15 different languages in 18 countries and, in all these nations, the expectations of the citizens are different. My predecessor in the office of president of the ECB once told me that when he walked around Frankfurt, he was often asked when the prime interest rate would finally be raised. During walks in other European cities only a few days later, the question was when he would lower the prime interest rate.
We address these differences by making use of the inherent advantages of the euro system offered by the central banks of its 18 nations. Each of them has a communication department, which ensures the message of the ECB is heard and understood in the local context. Nonetheless, this remains a constant challenge for us.
From the beginning, the ECB was a leader in the area of transparency. We were the first large, central bank, for example, to hold monthly press conferences. Yet that alone is not enough in this era marked by new challenges and a more unconventional monetary policy.
The ECB also builds trust by being open. From the beginning, the ECB was a leader in the area of transparency. We were the first large, central bank, for example, to hold monthly press conferences. Yet that alone is not enough in this era marked by new challenges and a more unconventional monetary policy. For that reason, we decided to go a step further. Starting at the beginning of 2015, we will publish summaries of the fiscal policy sessions of the ECB governing council. This is another way to explain the measures we take and the considerations on which they are based.
We currently are doing test runs to find the appropriate format to achieve our goal of making these summaries understandable to the public. Only then will they achieve their full impact.
Mario Draghi is president of the European Central Bank. He can be reached at email@example.com