When the European Central Bank was first established, its founders were most interested in protecting the institution’s independence. The aim was to keep politicians from meddling in their affairs, so they made it as difficult as possible to implement change at the bank.
The end result is that the ECB is subject to little oversight, either from parliament or auditors. And the ECB’s Governing Council always attempts to reach consensus on issues internally. It is even nearly autonomous in deciding its own labor laws.
That is why when the European Court of Auditors recently wanted to look into the ECB’s banking supervision, the central bank refused to hand over all its documents: It saw a risk to its independence.
Even if the ECB did a lot of things right during the crisis, it is not immune to making mistakes.
But the biggest threat to the ECB’s independence is not posed by auditors hoping to review the bank’s policies on banking supervision. The real danger lies in the ECB potentially making a serious mistake, which could cost the institution its legitimacy. Even if the ECB did a lot of things right during the crisis, it is not immune to making mistakes.
This is why reforms should be aimed at improving the bank’s institutional learning, especially since the environment in which the ECB operates keeps changing. Traditional textbook models can no longer explain trends in inflation, for example. Furthermore, since the ECB has been assigned to supervise the largest banks in the euro zone, it has taken on tasks no one could have foreseen when it was founded.
This requires the ECB review the quality of its work at the same pace as its surroundings change. Here the institution could learn from other central banks, such as the Bank of England, which has reacted fast to new developments and in many areas become an international model. The Bank of England revamped its structures in a way that promotes change, for example, by setting up an independent evaluation office similar to the one used by the International Monetary Fund. This evaluation office is tasked with controlling the performance of the central bank and suggesting improvements. Not to mention the Bank of England’s monetary policy committee including four external members, including renowned economists from other countries, to strengthen the diversity of opinions, while bringing in new ideas. That should serve as an example to the ECB.
The ECB could also do with improvements in other areas, such as simply cooperating with the European Court of Auditors. Or allowing employees to participate in decision-making processes, which could ensure the bank detects mistakes sooner, rather than later.
It is true that when the ECB was founded 20 years ago, it was regarded as one of the world’s most modern central banks, but not anymore. In order to regain that reputation, the bank must be prepared to learn new lessons.
Jan Mallien is a Handelsblatt correspondent in Frankfurt. To contact the author: firstname.lastname@example.org