How can the European Central Bank be reformed to benefit wider society? Positive Money Europe Executive Director Stanislas Jourdan discusses how the central bank can be reconfigured to put people above private banks.
A shorter version of this interview was originally published in Catalan newspaper Ara.
Where are the democratic holes in the ECB?
By design, central banks are not democratic. They are technocratic. They were made technocratic because they are ruled by an economic ideology that states that politics should not be involved in the money creation process. This principle was historically adopted because of the fear of hyperinflation. To avoid politicians instructing the central bank to create money for their own political goals, most countries have adopted this model of ‘central bank independence’.
But board members of the ECB are appointed by elected politicians.
Yes, they are appointed by politicians. But once appointed, the rule is that politicians should not influence them for the remaining time of their mandate. They should be isolated away from politics. We need a certain separation of powers, but in my opinion we have gone too far with central bank independence.
Why do you think that we have gone too far?
Firstly, because inflation is not as much of a danger today. Secondly, by isolating central banks from politics, we let central banks fall under the influence of the financial sector. Central bankers see themselves as the bank of the banks – they function through and for banks, not for the wider population. In 2015, when the quantitative easing programme (QE) was launched by Mario Draghi, a huge amount of money went to the banking sector with the compromise that it should trickle down to citizens. In reality, it ended up benefiting certain people more than others. The money made the wealthy wealthier, inequality grew and wages remained low.
How can that be fixed?
First of all by improving how ECB Executive Board members are appointed. The European Parliament should have the right to veto nominations at the very least, which is currently not the case. Decision makers working at central banks should come from more diverse backgrounds. At the moment, they are mostly white old men. I am not thinking only about gender or race, but also diversity in ways of thinking. In the long run, we could even think of central banks as being managed by people selected like civil juries in the judiciary system, for example.
The ECB’s mandate should also be reviewed every ten years in order to make sure that its mission still matches the needs and priorities of society. For example, now we are in the middle of a pandemic and the ECB’s mandate is still only to keep inflation close to but below two percent. Well, good luck with that. This objective has not been achieved for the last decade and if now is not the moment to update it then when will be?
But there is an evident risk in letting a central bank be too influenced by the interests of politics.
We should find the right balance between independence and political influence. We do want a certain degree of separation of powers. That is why we propose a review every ten years to change the mandate, for example. A long term view is required, but it is also worrying that the ECB president has a certain immunity which makes it impossible to challenge them if they are not fulfilling the ECB’s mandate.
Central bank decisions should not be made in isolation from critics. The same ideology has ruled central banks for ever, and it seems that if something is written down in the EU Treaty then they assume it cannot be changed any more.
The mandate needs to be updated. The threat of hyperinflation that used to justify the current mandate is not there anymore. Inflation has been too low for the past eight years. Today, deflation is more of a problem than inflation.
Talking about inflation. Positive Money is also critical about the way it is calculated. Why?
The inflation index measured by Eurostat does not take into account housing market prices. The reason is because in 1998, when the euro was created, every country had different ways of measuring the price of housing.
The problem is that one of the main ways which monetary policy works is through mortgages. Between 30 and 40 percent of bank loans are for purchasing houses, so if you want to see how the ECB impacts the economy, you need to take developments in the housing market into consideration. Currently, the prices index only accounts for housing as the 6% on its weighting, so when there was trouble in the housing sector they did not see it in time.
Is Christine Lagarde’s presidency a chance for real change in the ECB?
When Christine Lagarde was appointed, she met with us and she launched a deep review in the institution about some of the issues we raised. There is a quite drastic change of tone and that is positive. But so far, she has not done so much. They are in a thinking process but not making policy changes. The question is that we have no guarantees about the conclusions of these reviews, but she has spent a lot of personal capital on instigating change.
They are now talking a lot about green bonds and helping to fight climate change. How can that be done from a central bank?
With QE for example, the ECB are injecting a lot of money into the financial system without any climate considerations. This means that the ECB is buying debt from fossil fuels industries, for example, who are responsible for a huge amount of carbon emissions. They should exclude some categories of companies from that program and focus on the sectors which can aid the transition to a greener economy.
The ECB also has huge leverage to support the green transition. The central bank is currently lending money to private banks with negative interest rates. The ECB could condition these negative interest rates on private banks increasing loans to companies and people that are doing something which aids the green transition, such renovating houses to make them more energy efficient and sustainable. The central bank could do this, but for now it is closing its eyes to what private banks do with the money.
How can a central bank work directly for people and not only for banks?
One way would be to issue ‘helicopter money’, which is literally the idea that the ECB sends money to directly citizens. It has not been done yet in such a direct way, but what the US did last year with the Treasury sending checks is close to that idea.
Isn’t there then a real risk for hyperinflation?
That is the risk, it is true. But if you give €1,000 to every eurozone adult, it amounts to 1-2 percent of the eurozone’s GDP. Even if all this is spent, it won’t bring inflation up more than a few percentage points, and as the ECB knows well, a little bit of inflation is positive for the economy and for job creation.
Positive Money advocates for the introduction of a public digital currency system in the eurozone. Why is that important, and isn’t it another way of giving the ECB more centralised monetary power while digital currencies could allow us to introduce a decentralized monetary system?
The proposal for digital euro is a bit different than the cryptocurrency debate. If the ECB is a democratic institution you don’t need the decentralization of power in that sense. Now, what we see is that banks are running the money system. They are processing all payments – Visa, Mastercard excetra. In some ways, states have lost control of the payment system. To regain control, they need to create their own currency in a way that people can use it.
If you look at your bank account you see that there are euros in there, but you do not have full control of them. Every citizen should be able to directly purchase and use the money that the Central Bank creates. We all know what happens when a bank goes bankrupt and people lose all their money. There should be a system in which people could choose between an electronic version of cash or to trust private banks.
Wouldn’t that kill the banking sector?
We would need a careful transition. But why do people need to be obliged to give their money to private banks? Is that ethical? Some people may even find the idea attractive. Banks would have to offer better conditions and convince customers that they are doing a good job. It might be even necessary to rebuild the banking system.