Published in Financial Times (10th of June 2013)
On Tuesday, the conflict between the European Central Bank and the Bundesbank will turn into a showdown before the German constitutional court on the legality of eurozone policy decisions. No matter how the court eventually rules, the case is straining a difficult relationship. It is time to defuse this eurozone time bomb. As one of 17 national central banks, the Bundesbank is part of the eurosystem headed by the ECB. The current argument is both about policy and mandate. It centres on whether the ECB does too much in supporting banks, markets and governments. One must note that the Bundesbank has surely been highly influential in shaping ECB policies. Would we really have the same conditionality of the outright monetary transaction bond-buying programme and the liquidity policies without the Bundesbank? Even so, it remains unhappy.
The division has grown so wide that Axel Weber, former Bundesbank president, and Jürgen Stark, a former ECB executive board member, have resigned. Jens Weidmann, the current Bundesbank president, has also reportedly threatened to do so. Why has this situation escalated? After all, in a democracy a plurality of views should be present in decision-making processes – for reasons of accountability but also to help make better decisions. But the founders of the ECB envisaged an institution that decides by consensus, speaks with one voice and whose members take a European perspective, not national ones.
That is why ECB governing council meeting minutes and voting records are kept confidential for years – to protect members from national pressure. This was rooted in the concern that a plurality of views would complicate decision-making and result in a cacophony that would confuse markets, ultimately resulting in an institution with low credibility and limited effectiveness. That ship has sailed. ECB governing council members openly express their views, which all too often are aligned with national interests. The hope of the founders that members of the ECB’s decision-making body would take a European perspective has not been fulfilled. The split with the Bundesbank is starting to have costly consequences for Europe and the euro. The rise in anti-euro sentiment and an almost hysterical fear of inflation in Germany are linked to Bundesbank warnings about the consequences of an over-loose monetary policy.
How can this conflict be resolved? By internalising it. The debate about policy should take place within the ECB – not in public and not via the media. But this will also mean changing the philosophy of the one-voice principle. Not only is it important to have the plurality of views reflected in decision-making; it is equally important that all views can be heard in the argument. Providing minutes, as the US Federal Open Market Committee does, would achieve this. The experience of the FOMC shows that it is indeed possible to have an expansive, contentious and multifaceted discussion in the process but then take a consensus decision.
Publishing the minutes has several advantages. First, it would give dissenting members a voice in the process, weakening the need for them to communicate individually on the outside. It would acknowledge the fact that governing council members feel accountable to their national constituencies.
Second, it might make ECB decisions more effective as financial markets would better understand the views of the policy makers. Setting out the variety of views is a very powerful tool for central banks because it allows markets to gauge their reactions better. This is particularly important in periods of high uncertainty and crisis. Third, such an approach would show that the ECB and Bundesbank are not so far apart. The Bundesbank tends to take a long-term view while the ECB focuses on fighting the current crisis. Much of the friction between the two stems from this difference. Minutes could help make that difference explicit and thus help build bridges.
The crisis is changing Europe and the euro. The ECB is playing a key role in this transformation. Having a variety of views can be a strength; embracing and giving a voice to this variety will make the ECB stronger and improve its credibility. And it will be important for resolving the ongoing conflict between the ECB and the Bundesbank. It is time to defuse this conflict, for the sake of both institutions and for Europe.
Republishing with courtesy of Financial Times