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Balancing the European Central Bank’s independence and accountability

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Published on Wednesday, 21 April 2021

The project EMULEG is one of six new interdisciplinary research projects which received multi-year funding in the context of the Audacity funding instrument of the University’s Institute for Advanced Studies.

EMULEG, led by political scientist Prof. Anna-Lena Högenauer and lawyer Prof. Joana Mendes, evaluates the role of the European Central Bank and the legitimacy of its crisis policies.

The role of European Central Bank (ECB) in monetary policy and in European Union (EU) law and politics has changed fundamentally in the past decade. Similar to the Eurozone crisis since 2009, the effects of the COVID-19 pandemic have again brought the ECB to the forefront of economic responses which are essential to preserve the Eurozone, and the EU itself. “While it has so far been successful, the evolution of the ECB remains deeply problematic, both in terms of legality and legitimacy. It faces a conundrum of independence and democracy that remains unsolved,” says Prof. Mendes.

According to the EU treaties, the ECB has a high degree of political independence. Its decisions on European Monetary Policy cannot be controlled by national governments or other European institutions. At the same time, its scope for action is theoretically restricted by a mandate laid out in the treaties. The ECB must prioritise low inflation. Only if this goal has been achieved can it seek to pursue other goals such as economic growth. In addition, the ECB cannot be a ‘lender of last resort’ (someone Member States can turn to when they urgently need funds and have exhausted all other options).

Undermining its transparency

In fact, during the Eurozone crisis and more recently during the COVID-19 crisis, the ECB has adopted new policies that increasingly ‘stretched’ its mandate and – arguably – clashed with the limits imposed by the treaties. Through its extensive bond-buying programmes, the ECB has in effect taken on an indirect fiscal policy role, potentially contradicting the Maastricht Treaty’s prohibition for governments to borrow money from the central bank to finance public spending. It also arguably contradicts ‘no bail-out’ rules ­that ensure that the responsibility for repaying public debt remains national and prevents risk premiums caused by unsound fiscal policies from spilling over to partner countries. In addition, the ECB failed to fully neutralise the inflationary impact of its policies several times between October 2010 and May 2011.

“During the Eurozone crisis, the ECB’s nonconventional monetary policies undermined the transparency of its monetary policy by blurring its mandate. As a result, many arguments that had been used to support the democratic legitimacy of the ECB’s policies became less obviously valid. The ideas of the ECB’s legitimate independence, its non-distributive policy-making, technocracy and depoliticisation were undermined,” explains Prof. Högenauer.

EMULEG proposes to re-define the institutional framework of the Economic and Monetary Union. It analyses whether the ECB’s independence is too high in light of the increasing polarisation of opinions on its policies and the growing importance of its decisions, and whether there are better alternatives to rebalance independence and democratic legitimacy.

The political science team under Prof. Högenauer will research how the ECB and other central banks communicate with the public, parliaments and governments in practice and how legal rules translate into political reality. The legal team under Prof. Mendes will research the formal rules on central bank independence and accountability in the EU as well as a number of other country cases and how they have evolved over time. It will also look at the role of courts in reviewing the legality of central bank policies.

Prof. Anna-Lena Högenauer from the Faculty of Humanities, Education and Social Sciences works on parliamentary examination of EU policy-making and questions of legitimacy and democracy. She has published several articles on the legitimacy of the ECB’s crisis policies with Prof. David Howarth (University of Luxembourg), on the German and French perspective on the ECB and the European banking union and on parliamentary scrutiny of central banks.

Joana Mendes is professor in comparative and administrative law at the Faculty of Law, Economics and Finance. Her research focuses on public authority in the EU, examining how this authority is exercised, the ways in which law substantively structures such exercise, and the relative role of administrative bodies and of courts in this respect.

The EMULEG project starts 1 June 2021.

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