President of the ECB Mario Draghi has announced that from January 2015 the ECB will publish an ‘account’ of the deliberations of Council meetings on monetary policy. Whether and how this new step along the road to greater transparency is taken is a matter of great import, and, to me, it is puzzling why they are considering doing this now at this delicate juncture in the ECBs face-off with markets.
In years past, a fiction was spun around such meetings that monetary policy decisions were not taken by voting, but instead were made once a ‘consensus’ had been reached. Unlike other systems in which dissenting views were irreconcilable, we were to believe that Governing Council members could instead reason their way to a common view of what was to be done with interest rates from month to month. Few believed this description of what went on, and I suspect no-one who had worked inside a central bank believed it either. But the fiction was useful, because it fended off inquiries about dissent, pretending that there was no dissent. And since there was no dissent, there could be no case to answer that Council members who were also Governors of member state central banks might be acting along national lines, which would be against their mandate as participants in the monetary policy discussions. Since short-term national interests ought always to conflict with their average, it would be impossible for a decision based on ‘consensus’ to be arrived at by members pressing parochial concerns.
The fiction that there was and is no dissent is long gone. It was surely gone by the time the ECB were debating the Securities Market Program, and subsequently the Outright Monetary Transactions, which appeared to trigger the resignations of Axel Weber, former Governor of the Bundesbank, and Juergen Stark, former Chief Economist at the ECB. Depending on how the ‘account’ of policy discussions is written, dissent will be out in the open. For discussion will be whether votes are attributed or not. But the insinuation in the announcement by Draghi is that votes do happen, and will happen, regardless.
ECB watchers used to worry about the pressure to vote along national lines when all that was at stake was tweaking the interest rate up and down a little to smooth the already moderate Eurozone business cycle. But these pressures have been greatly magnified by developments in the phase of the crisis when private financial risks became socialised, threatening the solvency of EZ members, and the future integrity of the currency area that they form.
They have been magnified in two ways.
First, the consequences of making a policy mistake, either for the EZ as a whole, or, if one is determined to vote along national lines, for one’s own country, are much greater. In the periphery, it seems conceivable that bad monetary policy might not just result in an exit from EMU, but that the orderly functioning of democracy and capitalism itself might be endangered.
A second kind of magnification of the pressures on Council members is that at the core of the debate is what the ECB is for; what it can do given its mandate. SMP and OMT are judged by some [usually Northerners] to amount to fiscal policy, and anyway undesirable. They are judged by others [usually Southerners] to be desirable regardless. It might be easy for member state Governors to disappoint their Finance Ministry bosses when they are asked ‘throw us a soft interest rate will you?’ than when they are asked ‘get us unlimited purchases of our otherwise unsellable short-term bonds, will you?’
Should the ECB publish these minutes or not?
Publishing minutes will reveal to Governments – if they did not already know from grilling them privately – whether their Council members did what they were told or not. Does this matter? Governors are appointed by their home governments, and can’t be sacked before their 5 year term is up. But those terms can be renewed, so home Governments can threaten not to renew to tilt their Governor’s votes. This threat would be more credible if the Government knew what its Governor had been saying and doing at Governing Council meetings. Even if a Governor were not interested in renewing, or they had reached the end of their second term, there are still other goodies that could be denied them. One might think that such a Governor might hope to rotate into another important non-Government job, or a political post, or even that the Government might facilitate or not stand in the way of a move into an influential private sector job.
Another argument against is that publication might complicate the operational effectiveness of the current policies. The legitimacy of the promised OMTs is, for some, open to question. Publishing dissent could involve publishing influential text repeating this view that OMTs are outside the ECB’s mandate. This might or might not be material in any of the legal proceedings involved, but it would certainly increase political pressure to withdraw the necessary fiscal backing and make OMTs less likely to happen should a sovereign member be the focus of a market run. Regardless of whether the issue of legitimacy was on the table, dissent about whether OMTs were simply desirable would also, and more immediately, affect whether markets thought they were likely to happen or not. As I have argued before, in my view OMTs are an almighty bluff, requiring potentially unlimited backing that there can’t conceivably be political support for. A bluff is more likely to work if everyone bluffs together. If you read later that some were hesitant [‘should we try this or not? would we really follow through? I’m feeling queasy about this’] you might speculate that the majority for undertaking OMTs would not be there when needed.
The ECB seem to have thought this through carefully thus far, and were scrupulous to explain the policy in terms that made OMTs most likely to succeed. There was a careful [if, in my view, theoretically dubious] attempt to claim that one could separate solvency from liquidity problems with a sovereign. And, based on this, that one could therefore define OMTs as a monetary and not a fiscal action, the latter supposedly taken care of by the European Stability Mechanism.
So why publish now, if it might make things harder for the ECB?
The ECB is given the vaguest of goals, to preserve price stability, and is left to interpret what that means itself. So one can see that – as with many European institutions – there is a very good case for tightening accountability mechanisms. As I argued in the debate about whether the UK MPC meeting transcripts should be published, such steps towards increased transparency make it easier to monitor whether technocrats delegated jobs by democracies are doing what they are told, and doing it competently. But this pressure has always been there. Why now, when it is most inconvenient in operational terms? The large risks of taking this step seem to lie clearly on the downside.
I don’t have a good answer to this. From the point of view of those who incline against OMTs or future credit or quantitative easing, publishing dissent gives them a less nuclear method of expressing it other than resignation. But the disagreements of Weber and Stark seemed so fundamental, that one doubts that they could have been staved off by being able to write anonymised UK-style ‘some members…’ paragraphs into minutes. Supposing that there are less resolute opponents on the Council still, and putting ourselves in the shoes of the majority in favour, we might speculate that publishing minutes would be attractive because the majority would calculate that since dissenters can then go public, the majority can press their case running a smaller risk of triggering more resignations. Previous resignations seemed to fuel the sense of disorder and crisis in policymaking, and with published dissent the radical majority will be less likely to be held hostage by private resignation threats.
Actually, neither of these arguments seems that persuasive, and the timing of this development remains a mystery to me. Perhaps I am being too cynical in assuming some calculation behind this, and Draghi is simply trying to make the ECB a better institution.