In a report adopted this week, the European Parliament warns against the limits of quantitative easing and pressures the ECB to be more transparent and accountable.
On Tuesday February 5, the European Parliament adopted its annual report on the European Central Bank. Although the report is not legally binding, it serves a core purpose to evaluate the past activities of the ECB and make suggestions for how to improve the ECB policies. As such, the outcome of today’s vote put an end to 6 months of negotiations between parliamentarians and therefore materializes a good political state of affairs on monetary policy in Europe.
This year’s report includes a number of useful proposals and remarks. First, it provides a moderately critical assessment of the efficiency of the ECB’s monetary policy such as quantitative easing, highlighting many of the concerns we voiced over the past two years. However in contrast to last year’s edition, the report is much more innovative and ambitious when it comes to pressuring the ECB to be more accountable and transparent.
The report, which as led by Spanish MEP Jonas Fernandez, was adopted by a broad majority of 70%, including political groups from left to right.
Overall, we are satisfied that several of our recommendations were included in the final version of the report, in particular in the following five areas.
1. Limits and side-effects of quantitative easing
The report rightly highlights the failure of the ECB to achieve its price stability objective so far:
“that inflation in the euro area is expected to remain below 2 % until at least 2020, despite the very accommodative monetary policy followed by the ECB, which suggests that the euro area economy is not operating at full capacity“
The report also suggests that the ECB’s current tools could be inadequate for coping with another possible financial crisis:
“Considers that, given the current inefficiencies of the monetary policy transmission channels, the ECB must ensure that price stability, defined by the ECB Council of Governors as an inflation rate of close to but below 2 %, is achieved; believes that the ECB should nonetheless carefully assess the benefits and side-effects of its policy, in particular as regards intended action to combat deflation in the future”
Throughout the whole report, Parliament acknowledges the many problems that we have voiced against quantitative easing, including the effect of QE on inequality and asset bubbles.
In light of the above, the Parliament closes its first chapter with a sentence we wholeheartedly agree with: “Believes that the ongoing crisis has highlighted the need to diversify the theoretical background underlying the policy framework within central banks”
2. The ECB is legally bound to support climate change mitigation
QE for People has consistently campaigned to shift the ECB’s policy so that it is in line with accommodating climate change goals. In that respect, we regret that the report does not explicitly call on the ECB to adjust its policies to best contribute to building a sustainable economy (or at least to stop purchasing fossil fuel bonds).
However we appreciate that the Parliament ‘Notes that the ECB as an EU institution is bound by the Paris Agreement’ which is a step in the right direction. While some central banks in Europe and elsewhere are taking the lead on climate change, the ECB is lagging behind and needs to be pressurized to take action.
By acknowledging the fact that the ECB is bound to the Paris agreement, the report opens up for future discussion on the possible implications of the agreement for the ECB’s monetary policy.
3. The ECB must be more transparent
Importantly, the Parliament has adopted a bold call for enhancing the transparency of the Corporate Bond Purchase Programme (CSPP) – the section of the QE programme which goes to multinational corporations. The notable lack of transparency of this programme – which we flagged up very early on – led to a skirmish last year between EU politicians and the ECB in June last year.
Under pressure from a group of 40 MEPs, the ECB eventually conceded to implement some improvements on the transparency of the programme. However MEPs agree with us that the ECB can do better:
[The Parliament] ‘Calls on the ECB to continue ensuring full transparency over disclosing the volumes of the purchases made under CSPP for each company after a reasonable time period […] in any case full transparency should be provided when the programme ends”
As we wrote here, for this programme to be adequately transparent, it is essential that the ECB provides company-by-company disclosure of the volumes of bonds being purchased by the ECB. Such a measure would allow citizens to check, by themselves, how much each company is benefitting from the ECB’s programme and eventually to assess the overall sectoral and environmental impact of the ECB’s activities. By refusing to apply such transparency standard, the ECB has adopted a counter-productive approach which contributes to fueling the critics against it.
It is therefore extremely positive that MEPs are not giving up on this point.
4. The need for greater accountability of the ECB
In addition to transparency, Parliament also expresses the need for a strong democratic accountability of the ECB via the European Parliament.
[The Parliament] ‘Considers that the ECB’s independence, and thus its degree of accountability, must be commensurate with its importance; emphasises that the ECB’s responsibilities and tasks require transparency towards the general public and enhanced accountability towards Parliament;” the report reads.
Two particular points of this section brought our attention.
First, the report echoes calls for improving the appointment process of ECB board members. Just last week, we questioned the lack of democratic quality of the appointment process of board members of the ECB. We think the appointment process should be more open, transparent, but also more diversity-friendly. Over the past years, the process often led to only one candidate being put forward by the Eurogroup, instead of evaluating the qualities of several candidates.
The European Parliament took one step in that direction by demanding a “shortlist of candidates” to be provided to the Parliament. This is a low-key demand which the Eurogroup has no reason to refuse.
Second, the report also calls for an improvement of the quarterly hearings of the ECB President to the Parliament, the so called “monetary dialogue”.
Over the years those hearings have become a central channel for holding the ECB to account. However, all too often, the way these hearings are arranged prevent a fruitful discussion from happening between MEPs and the ECB President. This is mainly because the MEPs have too little time to ask questions and follow-up questions to the ECB President in order to get to the bottom of the topics being raised. As a result, the exchanges remain superficial and allow the ECB president to avoid sensitive questions too easily. Improving the setup of the monetary dialogue is also an easy step to improve Parliamentary scrutiny of the ECB.
5. Consider introducing public digital currencies
Finally, we are also satisfied that the report went as far as calling upon both the ECB and the European Commission to study the potential of central bank-issued digital currencies. The report reads:
[The Parliament] ‘Takes note of the ongoing discussions concerning a ‘central bank digital currency’ or ‘digital base money’ that would be made available to a wide range of counterparties, including households; encourages the Commission and the ECB to study such schemes with a view to improving public access to payment systems, alongside physical money”
With the impending ‘death of cash’ and the rise of unregulated digital currencies, there is a case for central banks to offer their own form of digital currency, by providing a risk-free alternative to bank accounts. By taking full advantage of the new technologies, not only could central banks be ahead of the curve, but they would would also be preparing for the future, as such schemes could be used to ameliorate the transmission of monetary policy, for example, by using it to deliver helicopter money.
In the preliminary debate held yesterday in Parliament, the vice-president of the European Commission Valdis Dombrovskis already announced that the Commission was willing to cooperate with the ECB to further study the potential of this idea. We look forward to seeing more conversation about this in the coming months.
Now is the time to upgrade the ECB’s governance
Overall, the Parliament’s annual report on the ECB provides fresh thinking on monetary policy and bold proposals to make the ECB more accountable to European citizens.
Throughout the financial crisis, the ECB has accumulated a lot more power than it used to have. It is long overdue that policymakers seek to adequately match the ECB’s powerful status and independence with more transparency towards the public, and higher accountability through the European Parliament.
It is very positive to see Parliament acknowledging such a wide range of problems the ECB was confronted with over the past years.
The ball is now in the ECB’s court to respond and incorporate Parliament’s suggestions. With a large majority of MEPs backing the report, the ECB has a duty to accept as many of them as possible, even though the report is non legally binding. And in case it does not follow-up, the ECB should at least explain why in its upcoming report which will be presented to the Parliament in April.
However everything is not just up to the ECB. For example, the appointment process of the ECB board members falls into the prerogatives of the Council of the EU, while revamping the Monetary Dialogue is mostly the responsibility of of the European Parliament’s Committee of Economic and Monetary Affairs (ECON). Both institutions should show leadership in taking those steps forward.
Positive Money Europe will seek to make its contribution by pushing institutions to put those words into action, in particular regarding the appointment process of ECB board members. Admittedly this such work is somehow beyond our “QE for People” proposals. To this effect, we will soon transform our campaign into a permanent organisation whose mission will be to scrutinize a large scope of issues surrounding ECB policies.
The full report is accessible on the European Parliament’s website.