When the ECB was created, it was intended to be an independent and apolitical institution that would oversee the running of the single currency. Kathleen R. McNamara argues, however, that far from dealing with purely technical issues, the ECB is the key player in a crisis that is inherently political. Its actions have significant distributional effects, yet the ECB does not have a robust political framework for contestation and debate about those effects. Without broader political union, it is impossible for the ECB to be fully legitimate. 

The muscular remarks last week by European Central Bank (ECB) President Mario Draghi pledging his institution’s commitment to do “whatever it takes” to save the euro got plenty of attention across Europe and the United States. It also demonstrated yet again the critical role being played by the ECB in the unending saga of the Eurozone crisis. Founded as a hyper-independent central bank and given a narrow mandate to fight inflation and protect the value of the euro, the ECB has been playing a dramatically more political role than that initially assigned by its creators. The ECB has been the key actor keeping Europe from financial meltdown, but its actions highlight the unsustainable political design of the monetary union, and the EU more generally. Fixing this political flaw, rather than doubling down on more technocratic solutions that fetishize austerity, is the central task for European leaders.
The EU has a very particular challenge when it comes to convincing financial markets about its future solvency and economic credibility. The euro was created in a breathtakingly bold act of political innovation, but it has been plagued by a serious political deficit from its début. The key problem lies in the disjuncture between a very developed monetary union centred on the ECB, and the vestigial political development of the EU more broadly. Despite the hopes of EMU’s designers that an independent central bank with a mandate to keep inflation low and defend the European currency at all costs would be enough to charm markets, the EU’s odd mismatch between a sovereign European currency and nationally sovereign fiscal and banking policies has proved disastrous once hard times hit. Historians are not surprised: a single currency without a single fiscal authority and political power at the centre of a political union is unprecedented. All functioning single currencies have been created as part of larger state building projects, where transfers of political power made the decision to unite into a single currency an expressly and inescapably political act, along with fiscal centralization. It is hardly surprising that investors are thus doubtful about the EU’s hodgepodge of governance and the commitment of Eurozone members to weathering the crisis together.
Paradoxically, the ECB was explicitly designed to circumvent the historically cosy relationships between markets and politics. The economists and ‘eurocrats’ who drew up the ECB’s rules, and the political elites that agreed to them, all had their eyes fixed on the last economic war—the horrible period of stagflation that began in the 1970s. Economic theories of the “political business cycle” and rational expectations theory called for an end to using monetary policy to stimulate growth or employment. In this view, little was given up by removing the ECB from the political fray. In the 2000s, with the flourishing of the Eurozone, it seemed that macroeconomic policy in the EU could be treated as purely a technical matter, like traffic rules, that need not engage partisan and distributional debates.
The drama of the euro’s crisis has, however, exploded the notion that central banks and monetary policy are apolitical in nature. Delegating authority to technocrats and intentionally stripping out democracy from an independent ECB seemed like a great idea at the time, but the fairy tale came to an abrupt end when the ECB stepped up to play a critical political role in the salvaging of Europe. The ECB has been front and center in the battle to save the euro, and its interventions, institutional innovations, and policy proposals have proved to be both novel and surprising. These actions have been successful at holding off financial Armageddon so far. But they have not been uncontroversial, viewed by some inside and outside the bank as poisoning the financial stability of the ECB itself and likely to produce an uncontrollable rise in inflationin the EU.
Even those who might applaud aggressive action to stabilize the European economy should be worried about the process by which the ECB has been assisting in the salvaging of the EU. As intelligent and well meaning as their officials may be, are we comfortable with an institutionally undemocratic institution calling the shots in a situation that is deeply and inherently political, implicating how scarce public resources are used, money spent, and who gets what part of the economic pie? Monetary policy, like regulatory policy or any other realm of policymaking has distributional consequences that demand broader democratic conversations about the values and goals of a polity and the social choices that its citizens wish to make. Democracy is messy, but it has the overriding benefit of creating legitimacy by opening up to contestation and discussion all the wrenching trade-offs that must be made.
The rise of populist parties in the EU, and the fervent public conversations about the costs and benefits of the euro, only reflect a long simmering debate, one that is best undertaken within strong democratic institutions, something lacking in the EU. Central bank independence is offset, in national settings, by robust institutions–a legislature and finance ministry or treasury–whose very roots are in the democratic, partisan process. With those partners, a national central bank, even if independent, will engage and interact and, ultimately, be more fully supported in its decisions. Without them, it is impossible for the ECB to be fully legitimate, despite being responsible for policies hugely consequential for the lives of European citizens.
Despite the heroics of the ECB, the EU desperately needs to ramp up its legitimacy to somehow drag itself out of the cataclysmic mess it is in. Until then, the EU leaders will have little luck in getting their stressed-out publics, or financial markets, to have faith in the solutions they are offering.

3.Aspects of Legitimacy and Democracy

3.1. Principle of Reversibility as a Justification

As described by Edwards, the formal entry into force of the Treaty of Maastricht in November 1993 was surrounded by a certain air of uncertainty along with one of relief.87 The discussion preceding this milestone indicated that a number of different elements that had seemed important in the past in legitimating the integration process now seemed deficient and inadequate.88 Thus, the consequent moves to establish a Political Union in Europe resulted not simply in the problems related to ratifying the Treaty but also in a more general scepticism towards the single currency which would symbolise the Union.89 Among the consequences were the results of the French and Danish referendums. In Germany the discussion was dominated by a number of cases where the legitimacy of the Treaty, especially that of the EMU and ECB, was questioned.90
After considering the cases the German Constitutional Court established that even if monetary policy in the EMU becomes isolated from parliamentary, democratic legitimacy, the German Constitution provides expressly that the functions and powers of the Bundesbank can be transferred to the ECB.91 Subsequent important alterations to the integration programme would, however, not be covered by the existing Act of Accession and would therefore not be legally biding within the sphere of German sovereignty.92 Placing most of the management of monetary policy on an autonomous basis in the hands of an independent central bank restricts democratic legitimacy, stemming from the voters in the Member States, and therefore affects the principle of democracy. This modification of the democratic principle was, however, according to the Constitutional Court, acceptable as it took account of the particular mention that an independent central bank is a better guarantee of the value of currency.93 Consequently, the placing of monetary policy within the independent jurisdiction of the ECB in accordance with the strict criteria of the Treaty and the Statute satisfied the requirements of the German constitution under which a modification could be made to the principle of democracy.94
The decision of the German Constitutional Court is often referred to in connection with the attempts to restore the democratic deficit. According to Gustavsson, the Court argued for a constitutional Status Quo, namely indicating that the principle should even in the future be provisional suprastatism and overstatism without democracy.95 Even today, many responsible politicians would argue in this way if placed against the wall.96 What makes the theory somewhat unreliable is, however, that according to the Treaty one of the constitutional principles applicable to the Bank is irreversibility in the form of irrevocable fixing of convergence rates97 and the fixing of the calendar for transition to Stage 3 of the EMU98 which provide the context for a fully operational ECB.99 Against this background the Constitutional Court's theory of the provisional nature of the transfer of powers is imperfect. Furthermore, the provisional character of suprastatism has never been demonstrated in practice.100 Also Article 312 EC states that the Treaty is concluded for an unlimited period, which gives the impression of the arrangement being rather permanent than temporary. The democratic deficit is defended by the Court in terms of marginality, predictability and revocability, which according to Gustafsson leads "one to expect that the Court would be disinclined to view the EMU as democratically acceptable".101 Still, the converse actually obtains. Thus, "in adducing the position of the constitutionally independent and guarded Bundesbank, the Court makes a European virtue out of a German exception from the general rule of popular sovereignty and democratic accountability."102
Following the Court's reasoning, price stability becomes a value of greater significance than democracy and its prioritisation takes place at the expense of other rights of the individual. Whether the EMU arrangements can be considered a modification of the principle of democracy is in the author's view debatable, as is the extent to which the ECB can be regarded as democratic at all. One aspect of the theory, forgotten by many, is the fact that the independence of the central bank is only one necessary condition for price stability103 and that stability cannot be achieved solely by monetary policy. Thus sacrificing a number of political rights does not in itself guarantee the fulfilment of other fundamental rights contributed to by price stability. 

3.2. Through Democracy towards Greater Legitimacy

The debate about democracy within the EU is part of a wider discussion on the status of human rights and fundamental freedoms in the Union. In the recent years, the democratic deficit of the Community governance has received great attention, partly due to the paradox of the principle of democracy otherwise being considered more or less a fundamental European value. Usually, and especially on ceremonious occasions, it is claimed that democracy legitimates itself.104 Even if public international law does not recognise the principle of democracy as such, the major international treaties do spell out the essential features of democracy, understood as the right of all citizens to participate in the political life of their societies.105 Recently some scholars have argued that democracy, or more specifically the right to vote in free and fair elections, has achieved universal recognition as an international legal right. 106
According to Scott, whilst it is the application of law that maintains the existence of a state, it is the democratic arrangements that legitimise the rule of law. A large portion of laws are accepted because they are fashioned by the democratic process and can be changed through the exercise of democracy.107 In a democracy the executive carries out the business of government whereas the constitutional role of the parliament is to scrutinise, to call to account and to make a global judgement of confidence in the executive government.108 Democracy is a way to create greater legitimacy. At one level, legitimacy is about the justification, and the acceptance, of authority and of the exercising of power.109 Thus, democratic legitimacy is a feature of collective decisions that accord with certain secondary rules.110 According to Nida-Rümelin, the decisions made using democratic procedures depend on the presupposition of being at least fundamentally capable of achieving common consensual agreement, whereas more comprehensive legislative projects are universally justified with normative arguments like the common interest, political justice and economic efficiency.111
An ideal form of government from a democratic point of view is a structure that guarantees justice and equal rights for all citizens who wish to participate in the decision-making. Decisions affecting the lives of individuals must be subject to public accountability.112 In brief, the civic virtue of contemporary government relies on the premise that the representatives of the demos decide policies for the interests of the demosand under the control of demos.113 The conception of democracy as an institutional arrangement has as its ultimate task to successfully channel and reflect the wishes of the majority in both the policy-formation and policy-execution stages.114 Still, it has been argued that political independence and democratic accountability do not need to be mutually exclusive, as there exist other forms of democracy apart from that based on the role of the parliament. Therefore, one way to create legitimacy is to limit and control the delegated powers e.g. through judicial review and predeterminated goals.115
Harden argues that even within the framework of a State, the complexity of the tasks of modern government is such that not all public power can be exercised directly by elected politicians.116 Every political system also includes a number of institutions that cannot claim to function in a democratic manner, such as the court system, but which are still a central part of a democracy. Still, at the same time as the citizens' possibilities to affect decision-making decrease their interest of the process also potentially disappears. Democracy in the European Union is certainly desirable and maybe possible, but only if new ways to design the institutional mechanisms for holding executive power accountable to Europe's voters are discovered.117 Therefore, even measures other than those usually suggested, increasing the powers of the European Parliament and of the ECJ, are needed. In any case, large-scale democratic deficiencies should not be seen as the price citizens must pay for their governments' European centred activities.118 Democracy and legitimacy are not co-terminus.119

3.3. Supervisory Mechanisms and Legitimacy

Credibility, legitimacy and accountability are central concepts that should be distinguished among when discussing the ECB.120 Credibility is based on the expectation that an institution can fulfil the functions it has been delegated and will properly carry out the functions it is entrusted with.121 In the case of the ECB it is crucial for the success of the Bank (and the EMU) that it can establish sufficient credibility and it is, in fact, questionable whether this has been achieved. Legitimacy, on the other hand, refers to the belief that a specific institution is widely recognised or at least accepted as being the appropriate institution to exercise specific powers.122 Accountability refers to the fact that the institution is more or less responsive, directly or indirectly, to the people who are affected by its decisions.123 Therefore, accountability and legitimacy are closely connected. On second thought, credibility has a connection with that form of legitimacy that is created through beneficial results. As stated by Cooper, the ultimate basis for a democratic government is "accountability to the public by all officials who make policy decisions affecting public welfare".124 Thus, according to Cooper, the ECB fails to satisfy this principle when it frames and executes one of the most important aspects of policy in modern economies, affecting hundreds of millions of people without being accountable to anyone.125 This also entails lacking legitimacy.
Both at the national and EU level recent years have shown a tendency towards autonomous organs, specialised agencies that have independent regulatory powers within a specific area.126 As a result of the transfer of certain powers to a new organ some of the legitimacy is lost - power can be delegated within the limits established by law but legitimacy does not automatically follow. Therefore the new institution must be able to create and establish its own legitimacy. This might in some cases prove a difficult task as these agencies are in most cases run by experts nominated by politicians and they implement extensive but by democratic methods marginally controllable power. Many of the problems in this context can be recognised even in relation to the ECB. Even though the legislative powers of the ESCB are subject to judicial review by the ECJ, which often is not the case with these agencies, the powers of the Bank represent quite a far-fetched model of indirect participation, even when assessed within the already problematic constitutional structure of the EU.127 The Bank is not the most suitable vehicle for increasing the accountability and overall constitutional value of the Community institutional matrix and even inside the EU its lack of accountability is highlighted.128
According to Scheinin, in the case of the ECB, the EC Treaty includes no appropriate legislative structure guaranteeing that the enactment of legal rules at the decisive stage of the process would be in the hands of a representative legislative body elected for that purpose.129 This means that the fundamental constitutional principle of the participation of those who are affected is compromised130 and indicates a lack of procedural legitimacy. At the same time this is a prevalent solution when central banking is considered - there exists hardly any central bank whose legal acts would be directly controlled by such an organ. On the other hand, the ECB has more comprehensive powers than most of the other central banks and de facto can adopt acts affecting the legal status of an individual. This makes one question the democratic accountability and therefore also the legitimacy of the ECB - the weakness in the possibilities to call for democratic control and accountability and the Bank's isolation from political influences contribute to an increased democratic deficit in the EU.131 The independence of the ECB can, however, also be seen, in accordance with the theory of the German Constitutional Court, as a modification of the principle of democracy that has been specifically created to implement monetary policy.132
The fact that the term of office of the members of the Executive Board is eight years and is non-renewable133 weakens the democratic accountability of the ECB even further in the sense that the public cannot show its dissatisfaction with the leadership by not renewing their mandates. During those eight years, a member of the board can be forced to retire by the Court of Justice only if he no longer fulfils the conditions set for the quality of his work or if he has been guilty of serious misconduct.134 Firstly, this entails that the appointments undoubtedly become political even if the mandate cannot be renewed. Secondly, however, this is not necessary a bad thing against the background of political legitimacy. As suggested by Gros, it is debatable whether or not the requirement strengthens independence: on the one hand it implies that governments cannot reward `soft' policy by a second turn. On the other hand it means that in practice the cohesion of the Board might be diminished and all Board members might be even more dependent on political good-will to find suitable jobs after their term has expired.135 Consequently, not only is the ECB shielded from politicians, the statutes also place it beyond the reach of democratic rules that sanction bad behaviour.136Furthermore, changes in the functions and goals of the ECB require the revision of the Treaty. This takes not only time but also the agreement of all Member States, which in practice makes it almost impossible.137
It is clear that there exists no idealistic nation state where all principles of democratic accountability could be made a reality also within monetary policy. Central banks have traditionally enjoyed varying levels of independence. There are, however, considerable differences between the ECB and national central banks,138 partly in their relation to parliamentary control. According to constitutionalism an independent central bank is a threat to democracy only if it is developed to have a management that works in parallel with the political government but under no requirement to function in an accountable manner.139 Some observers are of the opinion that accountability requires explanation and justification, but not necessarily control by elected politicians.140 According to the result-dominated theory, a loss of democracy in this sense can be accepted if economic efficiency is rated higher than democracy in the economic and political situation at hand.141 According to this theory it becomes crucial for the legitimacy of the EMU that the arrangement has demonstrable positive results.142 Furthermore, it is difficult to decide whether increased democracy would eventually produce more preferable economic effects.143
In democracies, all power is delegated power,144 and the parliament is free to make any decisions it wishes. Why therefore would it be wrong to give a central bank an independent status?145 After all, the possibility to delegate decision-making power is a necessary and widely accepted part of representative democracy.146 The independence of a central bank can never be absolute. Still, an organ of the state needs to implement its powers in a legitimate manner. Therefore, in a democratic state the independence of the central bank needs to be "accountable independence".147 Still, it should not be forgotten that the EC (EU) is not a democracy, at least not in the traditional sense.
It is often concluded that the deficit of democracy and legitimacy can be avoided by establishing other sources of accountability by way of combining different supervisory mechanisms all the time maintaining the important independence of the Bank.148 One possibility is public discussion and the principle of transparency149, which in the case of the ECB is limited. Another factor that could contribute to the democratic legitimacy of the ECB is the adoption of a binding objective through a democratic process. A fixed objective is, nevertheless, legitimate only if there is some kind of control on how the objective is interpreted and if there is a possibility to change the goal through a democratic process.150 In the case of the ECB the Bank interprets the goal independently.151 Revisory power of the European Parliament to amend the objective of the Bank would create legitimacy but this is not the case with the ECB.152 Furthermore, there is the possibility for judicial review of the acts of the ECB, which at least has strong potential in the construction of legitimacy.153
Fifthly, the requirement of professional expertise from the Board Members154 could create legitimacy by guaranteeing the high quality of decisions. The sixth alternative is the appointment procedure of the Members of the Bank leadership, which in the case of the ECB is not primarily democratic in nature.155 The ECB is under some reporting obligations to the other EC organs which, however, without any decision-making powers can only have a limited role in contributing to the Banks's democratic legitimacy.156 The eighth possibility is the European Parliament, the modest role of which in the EU structure is apparent.157 Furthermore, one should remain critical of the possibilities of the European Parliament to increase legitimacy and democracy in the EU. According to Edwards, the elections to the EP have witnessed a relatively low and even falling voter turnout and therefore it would seem that the organ has only won limited credibility with the electorate.158 Finally, Scheinin mentions the possibility of national parliaments participating in the decision-making.159 But as decision-making powers are delegated to genuinely independent or supranational bodies, as is the case with the EU, the possibilities of national parliaments are very limited, as decisions are not made by Government representatives but by independent operators, such as the ECB.160 These nine alternatives show, according to Scheinin, that there is certain strong potential for combining independence and accountability in the operation of the ECB, but at the same time they show worrying signs of a serious deficit of legitimacy.161 Gros, on the other hand, concludes that the claimed conflict between the requirement for a central bank to be independent and the idea that it should also be accountable for its actions to a democratic body can be more apparent than real.162
It has been stated that the ratification of the Treaty and Statute by all Member States, a clear legal basis and organs with (even if only indirectly) elected members guarantee that the independence of the ECB does not result in a complete lack of any democratic control.163 Some authors are, however, of the opinion that accountability cannot be guaranteed simply by the fact that the initial stage of the EMU is democratic but that the continuing operations and policies of the Bank should be subject to democratic control.164 This entails first and foremost a problem connected with the Treaty-making.
One possibility to increase democracy would be to give the Council the right to override actions of the ECB in some cases, but only after debate in national parliaments.165 The competence of the European Parliament could be strengthened so that it at least could initiate an amendment to the Statute even if the change would require the approval of the Council to take legal effect.166 Another alternative would be the creation of a specific supervisory Board that would function independently from both Community and national instances.167 This institution could oversee the ECB's work and eventually have the power to veto, delay or at least discuss its decisions.168 The basic problem of independence and accountability would, however, still remain as it is highly unlikely that this kind of a government would itself be directly accountable,169 maybe unless the organ would be elected by and accountable to the European Parliament.
Without risking the required independence of the ECB and restricting the competence of the ECJ it would be necessary to guarantee that the political institutions of the EU have adequate possibilities to decide whether the monetary objectives and acts of the Bank correspond with the financial objectives of the Union as well as how the ECB in practice manages to achieve these goals. Those supportive of a strong and independent central bank find that sustainable and successful monetary policy is a prerequisite for legitimacy. Still, clarity and credibility can only be achieved through explicit voluntary precommitments to certain intentions and the possibility for the assessment of performance and results in case the predetermined criteria are not met.170 Furthermore, as stated by Obradovic, the concept of legitimacy refers not merely to the validation of rules and rule making but also to the acceptance of legal decisions by individual citizens, as a moral obligation to accept them.171
The question of the ECB and legitimacy has been answered in two ways. To the first group belong those who think that the existing mechanisms constitute an acceptable and sufficient guarantee of legitimacy. To the other group belong those who find that even if the dispersed and scattered arrangements within the EMU contribute to creating legitimacy. The Bank's powers give reason to feel uneasy about the legitimacy of the arrangement. Thus, the ECB cannot fulfil the requirements of democratic decision-making. The opinions vary as greatly between those who oppose the democratic deficit and those who speak for new restrictions to the implementation of the principle of democracy in order to create more technocratic ways of governance. To the latter group belong those who are in favour of a total abandonment of accountability, a position that according to Gustavsson is "needed in order to defend the idea of the European Central Bank being irreversibly beyond any possible influence from electoral change or shifts in public opinion".172
In the already problematic structure of the Union the criticism against the ECB is highlighted even if an independent central bank is a normal solution in national arenas. It is extremely difficult to solve the problem of independence versus accountability. How to make the ECB more accountable and still keep it independent of political decision-making? As for a vision for the future, as stated by Brentford, "there is no evidence that the trade-off between independence and accountability will necessarily disappear in the long run." 173 With reference to the risk of inflation it is possible, however, that the Bank is one of those efficiency-oriented institutions that can only be legitimated through its results.174 Still, it is difficult for many to accept a political theory not built upon the principle of representiveness and not open to the possibility of changing policies and office-holders as the result of general elections.175 Therefore, there are observers who find that, in line with the German Constitutional Court, provisional suprastatism remains the best available option.176 In the author's view, however, the theory is more fiction than facts and therefore hardly realistic. As stated by Chryssochou, "if the Union is ever to meet even the minimum requirements of a large-scale democratic polity, it needs to adjust its present arrangements to ensure the closeness, representativeness and accountabilty of the governors to the governed".177 This applies even for the ECB. The Bank is in many ways characterised by a lack of democratic legitimacy. Thus, it is crucial to determine whether other arrangements can contribute to the establishment of sufficient legitimacy, which in the case of the ECB is questionable.
At the same time it is fully possible that the democratic problems of the Union and the Bank have been exaggerated. Even at the national level there are a great number of institutions that lack democratic accountability, such as the central banks in general, but their legitimacy is questioned extremely seldom.178 Generally however, as explained by MacCormick, the deepest enemies of democracy in the contemporary world is the relapse to rule by a virtuous few, whether it be judges of a supreme court, a council of ministers deliberating in private or a bureaucracy of highly trained experts.179 According to Louis, in a democratic society it should always be the political authority that has the final word, even with regard to a central bank. 180
The possibility for a real, pluralistic and participatory democracy in the Union exists. It is, however, unclear whether there is political will to improve the situation.181 The reality might be that the legitimacy and the relevance of the whole of the Union is not sensed by large sections of the public.182 The same applies to the norms adopted by the ECB and central bank actions in general.

87 Edwards, Geoffrey (1998), p. 121.
88 Idem., p. 125.
89 Idem., p. 131.
90 The best-known case is Manfred Brunner and Others v. the European Union Treaty, Bundesverfassungsgericht (2. Senat) 12.10.193, Cases 2 BvR 2134/92 and 2159/92. The case has also been published in (1994) 1 CML Reports 57, Vol 69(2), pp. 57-108.
91 According to the Court, this provision also means that the implementation of the power is not in itself contrary to basic rights. Protection of fundamental rights is result of a "relationship of co-operation" between the ECJ and the Constitutional Court. Brunner and Others v. the European Union Treaty, pp. 78-79. According to the Court, it is part of the unassailable content of the democratic principle that the carrying-out of state functions and the exercise of state powers is derived from the people of the state and the persons exercising them are fundamentally answerable to the people. Still, the necessary relationship of responsibility can be established in various ways. What according to the Court is decisive is that a sufficiently effective content of democratic legitimacy, that is, a specific level of legitimacy is achieved. Idem, pp. 84-85.
92 Brunner and Others v. the European Union Treaty, p. 89. According to the Court, Germany's membership in the Union and the rights and duties that follow therefrom have been defined in the Treaty so as to be predictable for the legislature and are enacted in the Act of Accession with sufficient certainty. Idem. The Court underlined that the interpretation of the Treaty might not have effects that are equivalent to an extension of the Treaty and that such an interpretation of enabling rules would not produce any binding effects for Germany. Idem, p. 105.
93 Brunner and Others v the European Union Treaty, p. 104. Emphasis added.
94 Idem. p. 104. According to the Constitutional Court the fact that an independent central bank is a better guarantee of price stability has been tested and proven in the German system.
95 Gustavsson, Sverker (1998), p. 214.
96 Idem., p. 215.
97 Now Art. 123(4) EC.
98 Now Art. 121(4) EC.
99 Brentford, Philip (1998), p. 83.
100 Gustavsson, Sverker (1999), p. 5.
101 Gustavsson, Sverker (1999), p. 5.
102 Idem.
103 Gros, Daniel (1998), p. 353. According to Gros other important factors that assure price stability in the long run are the aversion to inflation felt by the public and, more particularly, the behaviour of the representatives of employees end employers reflecting such an attitude. Idem.
104 Hermansson, Jörgen (1996), p. 37.
105 Curtin, D.M. (1997), p. 34. See e.g. art. 25 of the International Convent on Civil and Political Rights, referred to also in footnote 41. Rosas underlines that the article explicitly accepts both the direct and indirect forms of democracy. Rosas, Allan (1999), p. 438. Even if there exists no "right to democracy" can democracy be seen as a combination of some political rights such as the right to political participation and the right to vote. From these follows even the right to hold the decision-makers accountable through a possibility of not renewing a mandate in the next elections and this way require changes in the policy through periodic elections. According to Chryssochoou, a responsible government not only has to give an account of itself to its citizens, but also needs to be prepared to listen to, and answer questions in, the legislature about its actions and inactions. Chryssochoou, Dimitris N. (1998) p. 51. This requirement is partly fulfilled by the ECB.
106 This has been stated by Curtin, D.M. (1997), p. 33. Even according to Rosas it is clear that the international community has increasingly rallied around a basic requirement of democracy and political rights. Rosas, Allan (1999), p. 447. This is according to Rosas visible e.g. in the results of the World Conference on Human Rights in Vienna 1993 and the work of the OECD Human Dimension. Rosas also mentions the resolutions of the UN Security Council such as the resolutions on South Africa, Cambodia, Haiti and Burundi. Idem. pp. 446-447. Rosas makes also reference to the human rights clauses in all trade and co-operation agreements the Union has entered with third countries, which include an express right to suspend the operation of the agreement if the other party violates "democratic principles". Idem. p. 447.
107 Scott, Andrew (1998), p. 148.
108 Harden, Ian (1994), p. 624.
109 De Búrca, Gráinne (1996), p. 349. According to De Búrca, since the Member States lose much of the power, which is transferred to the European Union, their internal, constitutional structures can, at best, constitute only an indirect source of legitimacy of Community power. Idem., p. 352. According to De Búrca it is argued that given that the Union is not a state, it does not require the same mode of democratic legitimation, which we expect of the state, but can be legitimated in other ways. Idem, p. 353.
110 Nida-Rümelin, Julian (1997), p. 43. According to Nida-Rümelin, it is, nevertheless, difficult to say in abstract terms which secondary rules are constitutive for a democratic system. Idem.
111 Idem.
112 Chryssochoou, Dimitris N. (1998), p. 47.
113 Idem. , p. 56.
114 Idem., p. 48.
115 Majone, Giandomenico (1996), p. 13-14.
116 Harden, Ian (1994), p. 624.
117 Hix, Simon (1998), p. 47. According to Hix, for at least the foreseeable future, the EU is an `upside-down political system': the institutions at the national level exercise greater executive authority in most areas of public policy than the European institutions, and the media and the general public are primarily concerned with who controls these national offices. Idem. p. 44.
118 Chryssochou, Dimitris N. (1998), p. 63.
119 Weiler et al (1995), p. 6. One knows from the past of polities with arguably democratic structure and process, which enjoyed shaky political legitimacy and were replaced, democratically, with dictatorships. One knows from the past and present of polities with an egregiously undemocratic governmental structure and process which, nonetheless, enjoyed or enjoy high levels of legitimacy. Idem. ,p. 6.
120 The following distinction is introduced by Snyder in Snyder, Francis (1999), p. 463.
121 Snyder, Francis (1999), p. 463.
122Idem. According to Snyder, the legitimacy of the whole of the EMU is closely bound up with the nature and function of its institutions, the ECB and the ESCB.
123 Idem.
124 Cooper, Richard (1994), p. 70. Cooper underlines that whereas democracies differ greatly in their detailed institutional arrangements, the fundamental principle is the same.
126 Such agencies include for example the European Environmental Agency, the Agency for the Evaluation of Medicinal Projects, the Agency for Safety and Health at Work and the Monitoring Centre for Control of Drugs and Drug Addition. Power can be delegated to these administrative organs e.g. in order to create greater efficiency or increase expertise.
127 Scheinin, Martin (1998), p. 23. It has even been stated that the ECB represents a great deal of the EU's democratic deficit.
128 Brentford, Philip (1998), p. 110.
129 Scheinin, Martin, (1998) p. 21.
130 Idem. According to Scheinin, the situation of the ECB is corollary of the more general constitutional problem or defect in the constitutional structure of the EU. Hence, law making in the EU is not based on direct or first-degree-indirect participation of the people. Idem.
131 Laffan, Brigid (1997), p. 51.
132 Arndt, Hubertus (1996), p. 226-227.
133 Art. 112(2)b and Art. 11(2) of the Statute. The members shall be appointed from among persons of recognised standing and professional experience in monetary or banking matters by common accord of the governments of the Member States on a recommendation from the Council, after it has consulted the European Parliament, and the Governing Council of the ECB. The Statute includes specific provisions for the initial appointment of the Executive Board, namely that the President is appointed for 8 years, the Vice-President for 4 years and the other members for terms of office of between 5 and 8 years. None of these are renewable (Art. 50).
134 Art. 11.4 of the Statute. This is initiated by an application by the Governing Council or the Executive Board.
135 Gros, Daniel (1998), p. 355-356.
136 De Grauwe, Paul (1998), p. 1.
137 The requirement of all Member States acceptance, being primary law, makes the ECB immune to the incidence of political changes. Hahn, Hugo J. (1991), p. 814. In some Member States this would require constitutional amendments. At the same time it is, according to Herdegen, difficult to visualise higher restraints on democratic principles or a stronger entrenchment against majority rule between nations. Herdegen, Matthias J. (1998), p. 21. This view can also be criticised - unfortunately it is difficult to believe that the ECB in practice would be the most extreme example of an infringement of the implementation of the principle of democracy.
138 Hoffmeyer sees the accountability problem in relation to the question of ultimate political control and considers the central banks functioning in national systems having at least two formal strings to the political system. Firstly, their rules have been stipulated and can be revoked by parliaments. Secondly, central bank leadership is nominated politically and in almost all cases for a limited period. In addition monetary policy decisions are subject to public opinion in the sense that they must be understood and in the long run accepted by the public. Hoffmeyer, Erik (1992), p. 37. According to Elgie, compared to other central banks, the institutional architecture of the ECB is a departure from the norms of political accountability and there therefore is a distinct "democratic deficit" which needs to be addressed. Elgie, Robert (1998), p. 53. Central Banks in the Euro area do, however, suffer from similar problems than the ECB and as their status was strengthened through the convergence criteria.
139 Heikkilä, Vesa (1993), p. 41.
140 E.g. According to Harden, in a democracy there is no reason for all public power to be concentrated n the hands of an executive government. Harden, Ian (1990), p. 414.
141 But this only assuming that the decision is unanimous and that the economic efficiency actually increases as a result of the politically independent monetary policy. This is one way of handling the problem of the democratic deficit. Agné, Hans (1998), p. 28. At this point it is possible to see some connection with the infranational (or the neo-corporatist) model of government of J.H.H. Weiler as the implementation of law is rather justified by results than process. See e.g. Weileret al (1995). See also and the problem of "utilitarian support" in Obradovic (1996) mentioned in footnote 40.
142 Hermansson, Jörgen (1996), p. 38. The same applies to the whole of the EU.
143 Idem., p. 37.
144 De Grauwe, Paul (1998), p. 2. According to de Grauwe, people delegate powers to politicians and politicians delegate it to specialised institutions. In order for the pyramid to work well, at each stage there must be a strong mechanism, which ensures that those who receive power remain accountable.
145 Arndt, Hubertus (1998), p. 221.
146 Idem., p. 222. See also Jyränki, Antero (1994). According to Jyränki, the more democratic a law-making procedure is, the easier the delegation is approved of and the longer the distance to political institutions, the weaker political supervision becomes. Jyränki, Antero (1994), pp. 142-143. According to Jyränki, the principle of democracy can also be regarded as meaning that the legislative power can only be exercised by a parliament. Jyränki, Antero (1994), p. 140.
147 Lastra, Rosa Maria (1992), p. 482.
148 The topic has been discussed by a number of scholars. The nine (most comprehensive) alternatives following in the main text are introduced by Scheinin in Scheinin, Martin (1998), pp. 28-33. Another theory is introduced by Majoneaccording to whom independent organs can be placed under democratic accountability through different control mechanisms. Majone names clear objectives and procedural requirements, judicial review to protect the rights of individuals, expertise to guarantee the technical quality of decisions, transparency and the participation of the public to guarantee the organs responsivity in relation to it. Majone, Giandomenico (1996), p. 14. For Padoa-Schioppa's theory see footnote 163.
149 According to Scheinin, many central banks have improved their capacity to be in regular dialogue with the media. Every statement by a central bank is, however, a message to the market and is intended to influence market operations. Therefore, this communication must be seen as instrumental and not discursive. Scheinin, Martin (1998), p. 29. According to Ungerer, however, the central banks in Germany, Switzerland, the US and the Netherlands are not independent in that sense that they would be outside democratic control and the formulation of public opinion. Ungerer, Horst (1993), p. 18. 

The ECB has often been discussed in relation to the central bank of New Zealand. According to Mayes it is, however, impossible for the ECB to reach a population more than 100 times that of New Zealand, a fact that in practise sets the banks in very different positions. The problem with respect to the ECB becomes more serious in connection with the whole of the EU's democratic deficit. This makes the ECB rather to follow the rules it has been placed under than to see its competence in the future restricted. Mayes, David G. (1998), p. 24.

150 According to Arndt the possibility to change the judicial status and objectives of the central bank functions as an alarm system. The law the regulating the status of the central bank must be based on the will of the citizens. Therefore it should not be possible for a central bank to function in the long run without the acceptance of the citizens. Arndt, Hubertus (1998), p. 223. Also Cooper suggests that the European Parliament should be given the power to amend the Statute, by analogy with independent national central banks (perhaps by special majority), without the much more arduous (and unanimous) process required to change the whole of the Treaty. Cooper, Richard (1994), p. 71.
151 Scheinin suggests that greater transparency and accountability could be created through a process through which the ECB and the Council together would determine a numeric inflation target for a fixed period of time in order to concretise the primary objective. Scheinin, Martin (1998), p. 30. 

According to Gormley and de Haan, the objective of the monetary policy should be decided according to normal democratic procedures, i.e. logically by the European Parliament, but the game should be delegated to the ECB. Against this background, the ECB falls short of democratic accountability. Gormley and de Haan (1998), p. 112. The article is analysed in Francis Snyder (1999), p. 466.

152 In the case of the EU, neither the European nor the national parliaments have the power to amend the objective. Scheinin, Martin (1998), p. 32.
153 Scheinin, Martin (1998), p. 30.
154 Scheinin, Martin (1998), p. 30. According to Scheinin the idea of transferring the power to make decisions from "politicians" to "experts" is fundamentally undemocratic. Idem. According to De Grauwe, political independence of the ECB has been based on a very primitive theory according to which the ECB consists of wise men, whereas politicians are wicked people eager to undermine the good policies of the central bank. De Grauwe, Paul (1998), p. 1. Also according toArndt the theory he calls "Verständnis-Argument" including that only experts being capable of making monetary policy decisions sounds somewhat exaggerated. Arndt underlines that the national parliaments take continuously decisions within other very complicated areas and therefore it is not motivated to claim that specifically monetary policy would be an area needing a separate independent government. Arndt, Hubertus (1998), p. 218. See also Scheinin, Martin (1997b), p. 181.
155 Scheinin, Martin (1998), p. 30. According to Scheinin the independence of the central bank would undoubtedly be compromised in case the Governor of a NCB could at any time be given a vote of non-confidence.
156 Idem., p. 31. Gros points out that the reporting obligation can still be useful for parliamentarians in helping develop understanding of the policies of the central bank. GrosDaniel (1998), p. 359. Greater powers to the European Parliament with regard to the ECB, through a regular report by the ECB president and a formal veto power over the ECB leaders and this way a transformation in the distribution of power in the EU system of multi-level governance signifies, however, according to Snyder, increased legitimation without increased democratisation. Snyder, Francis (1999), p. 466.
157 Scheinin, Martin (1998), p. 31. The seriousness of this defect will according to Scheinin depend on the role of the national Parliaments in relation to NCBs and the operation of national Governments in the Council. According to Dashwoodet al, the political accountability of the ECB makes a domain where the European Parliament will have to play a role in a context very different from that prevailing at national level. See Dashwood, Alan et al (1999), p. 519. An important aspect of the future role of the European Parliament is its ability to exert control on the Commission and the new independent agencies, among them the ECB. According to the authors, the Parliament has several times asked for greater powers e.g. in the appointment procedure of the Executive Board members in the same way it participates in the appointment of the Commission. See Dashwood, Alan et al., p. 519. Greater powers to the Parliament in this area would, however, mean taking a new step towards a federal Europe. Cooper, Richard (1994), p. 71.
158 Edwards, Geoffrey (1998), p. 129. Still, the European Court for Human Rights established in the case Matthews v. the UK that "the European Parliament represents the principal form of democratic and political accountability in the Union". "Despite its limits the legitimacy of the organ it "derives its legitimation from the direct elections by universal suffrage" and therefore the organ "must be seen as that part of the Community structure which best reflects concerns to "effective, political democracy" (point 52).
159 Scheinin, Martin (1998), p. 32-33.
160 Idem.,p. 33.
161 Idem.
162 Gros, Daniel (1998), p. 359.
163 Studt, Detlef (1993), p. 249. See also Padoa-Schioppa, Tommaso (1994), p. 189 who mentions the ratification of the Treaty by all Member States and the judicial review guaranteeing its implementation by the ECJ; the national appointment procedures of the ECB leadership; the right of the president of the Ecofin Council to attend meetings of the ECB Council and the annual report of the Bank. Consequently, according to Padoa-Schioppa, the Bank clearly fits into the political structure of the Community and interact directly with the other institutions. Thus, its legitimacy is achieved in four ways.
164 Lastra, Rosa Maria (1992), p. 499.
165 Cooper Richard (1994), p. 71. This idea is based on the model in use in the Netherlands. In practice this might be both complicated and time consuming with reference to the rapid changes in the market.
166 Cooper, Richard (1994), p. 71 ; Scheinin, Martin (1997b), p. 202.
167 Padoa-Schioppa, Tommaso (1994), pp. 171-172 making reference to the Delores report; Antola, Esko (1997), p. 20. This kind of an organ has been successfully in use in some Member States, e.g. in Finland where the Parliamentary Trustees of the Bank of Finland have guaranteed parliamentary supervision at least at some level. A similar organ could supervise the ECB and eventually review or at least discuss decisions taken by the Bank.
168 Elgie, Robert (1998), p. 67. According to others the organ should possibly not have binding power on the acts of the Bank. Antola, Esko (1997), p. 20.
169 Elgie, Robert (1998), p. 67.
170 Mayes, David G. (1998), p. 27.
171 Obradovic, Daniela (1996), p. 194.
172 Gustafsson, Sverker (1999), p. 19.
173 Brentford, Philip (1998), p. 109. According to Brentford, "it is arguable that a lack of broad public support or the total absence of political involvement in monetary policy would lead to a central bank eventually being overridden." Idem.
174 Brentford, Philip (1998), p. 109.
175 Gustavsson, Sverker (1999), p. 18.
176 Gustavsson, Sverker (1999), p. 18.
177 Chryssochou, Dimitris N. (1998), p. 47.
178 Majone, Giandomenico (1998), p. 155.
179 MacCormick, Neil (1994-95), p. 296. According to MacCormick, this can be avoided through control of sovereign government and with full and equal participation of all citizens, or at least those who wish to involve themselves.
180 Louis, Jean-Victor (1990), p. 57. According to Louis, in case of persistent disharmony between the government and the central bank its importance depends greatly on the degree of autonomy granted to the central bank.
181 Ward, Ian (1996), p. 95. Gustavsson argues that even if it has become politically correct to believe that influential politicians actually wish to abolish the democratic deficit it is not necessarily so. Gustavsson, Sverker (1996), p. 123. Governments wish to avoid making the Union democratic. For functionalists, the deficit is a central element of the Union, which becomes problematic only in the area of public opinion. Idem, p. 108. Thus, governments do not wish to empower the European organs with the same legitimacy they enjoy. Therefore the democratic deficit turns into a weapon against the powers of the EU in their hands.
182 According to De Búrca, "the reality may be that, despite many years of high-sounding Treaty preambles and general declarations of peace and prosperity, the legitimacy and relevance of the EU is not felt by large sections of the public. Much of the Community law which affects people's lives seems either trivial or irritating, or important but at such a level of remoteness that there seems little prospect of any influence over the policy and little understanding of why it ought to be decided at a European rather than at any other level." De Búrca, Gráinne (1996), p. 374-375.

ECB's role in the troika questioned

Marisa Matias, a Portuguese member of the GUE/NGL group, is convinced that the ECB has exceeded its tasks while participating in the troika: "The ECB directly interferes in fiscal and economic policies in bailout countries and is a key actor in fiscal consolidation policies… This intervention has a huge impact on the options available for the affected member states to stimulate employment and growth."

According to Gianni Pittella, who is reponsible for drafting the EP's recommendations on the ECB's 2012 annual report, a new system for managing bailouts is needed in which the ECB plays an advisory and not a political role.The Italian member of the S&D group explained: “The troika is unaccountable and is doing a bad job by carrying out harsh austerity measures that hit the weakest and exacerbate debt problems.” Mr Pitttella added that the report approved by the EP's economic committee calls for the troika to be replaced by “a system where the Commission is put at the heart of the mechanism and is accountable to Parliament".

Ildikó Gáll-Pelcz, a Hungarian member of the EPP group, pointed out that the successful economic recovery of bailout countries is important, because it also greatly affects the euro and this explains why the ECB has to be involved. “Besides financial assistance, austerity and well-managed budget discipline are also needed to get countries out of the crisis,” she said.

Accountability and independence

All three insist there is no contradiction between preserving the ECB's independence and the need to hold it to account. Mr Pittella said: “The ECB is independent, no one wants to undermine this. But independence without democratic scrutiny is dangerous. We do not want the ECB to become a sort of benevolent tyrant.”

Both Mr Pittella and Ms Gáll-Pelcz call for more disclosure of the discussions in the ECB's governing council. Ms Matias said: “The main problem is that the ECB is not subject to democratic control as it should be."

Ms Gáll-Pelcz also highlighted the different roles the ECB plays in safeguarding monetary stability, in taking part in the troika, and soon in the EU banking union. “Each role of the ECB must be separated carefully and clearly,” she pointed out.


The Independence and Democratic Legitimacy of the European Central Bank in the Public Debt Crisis

1. Introduction
June 2010 witnessed the opening of a new chapter in the history of the European Central Bank (ECB). Without any debate or decision-making process outside the closed doors of the ECB’s conference rooms, the Bank decided to extend its activities far beyond the field of traditional monetary policy. With the launch of the Security Markets Programme (SMP), it began to purchase government bonds on a large scale. The programme was temporarily suspended in Spring 2011 but was then revived with another significant bond purchase initiative in August. The ECB does not publish which country’s debt it buys. However, it is widely believed that the first purchases were focussed on Greek, Irish, and Portuguese bonds, while the revival of the programme mainly included Italian and Spanish ones (Müller et al. 2011; New York Times 2011; Washington Post 2011). As of late October 2011, the ECB has acquired overall more than €170 billion of sovereign debt (Der Spiegel 2011).
But what gives the ECB the right to intervene in member states’ fiscal policies in such a drastic way? And are the Bank’s actions reconcilable with democratic principles?1 This essay will try to answer these questions by carrying out a three-step analysis of the ECB and its policies. The first section will examine the scope of the Bank’s independence in general terms. Afterwards, the second section will review different theoretical approaches presented in the relevant literature to justify the Bank’s independence in terms of democratic legitimacy. Finally, the third section will relate the findings of the first two parts to the current events and assess the implications of the SMP for the independence and the democratic legitimacy of the Bank.
It will be argued that the ECB enjoys a degree of independence that is quite extraordinary and which has provided the Bank with the powers to expand its competencies in the debt crisis. Prior to the start of the SMP, this independence could be interpreted as compatible with democratic principles on the basis of both Principle-Agent Theory and a constitutionalist approach. However, considering the SMP, Principle-Agent Theory remains the only possible justification in terms of democratic legitimacy, and only as long as the SMP remains a temporary measure that precedes corresponding actions on the side of governments.2
2. Unprecedented Independence
Where the independence of the ECB is concerned, some political scientists quickly resort to superlatives. Salvatore (2002, 158-159), for instance, calls the ECB “the world’s most independent central bank,” while Brentford (1998, p. 106) claims that “the European Central Bank has been endowed with greater powers than any other non-majoritarian Community institution to date.” Statements of this kind have to be treated with a certain degree of caution. After all, there is no such thing as an official ranking of all non-majoritarian institutions around the world, and the concept of independence remains subject to various definitions and methods of measurement. Nevertheless, the relevant literature widely agrees that the ECB enjoys an extraordinary degree of it, which goes further than the independence of any other institution responsible for monetary policy in a Western democracy.
A statistical foundation for this view is provided by a synthesis of the comparative research done on central bank independence, presented by De Haan (1997, p. 413) and by De Haan and Eijffinger (2000 pp. 396, 404-405). Their work includes a comparison of various numerical indices designed by previous research in order to measure central bank independence. All of these indices assign an independence score to the ECB that comes very close to the respective model’s maximum. This exceptional independence of the ECB can be explained by four key factors:
  •        First, Art. 130 and 282.3 of the Treaty on the Functioning of the European Union (TEC) in combination with Art. 7 of the ECB-Statute3 explicitly prohibit member states and EU institutions to instruct or influence the ECB in any way.
  •        Second, according to Art. 283.2 TEC, the six members of the ECB’s Executive Board are appointed for one non-renewable term of eight years. In addition, Art. 11.4 ECB-Statute provides that a board member can only be removed from his post by the European Court of Justice on application by the Executive Council or the Governing Council4, and only if he “no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct.” Furthermore, Art. 14.2 ECB-Statute also requires a minimal office term length of five years for national central bank governors and sets similar conditions for their premature removal.
  •        Third, Buiter (1999), and De Haan and Eijffinger (2000), stress that the ECB gains additional independence through the vagueness of the treaty provisions concerning its goals and procedural requirements. While Art. 127 TEC defines the maintenance of “price stability” as the ECB’s primary objective, it leaves it up to the bank to interpret the exact meaning of the term. Neither do the treaties set clear and comprehensive standards regarding the transparency of ECB decision-making and information policy.
  •        Fourth, as Brentford (1998, p. 109), De Haan (1997, p. 417), Heisenberg and Richmond (2002, pp. 211-212), as well as Verdun (1999, p. 108) point out, the competencies of the ECB are much harder to curtail than the competencies of any comparable institution at the national level. This is due to the fact that the legal provisions constituting the ECB are part of the EU’s treaty framework – a framework than can only be changed through a lengthy procedure which requires the approval of all member states. As a result, the threat to change the Bank’s legal foundations does not constitute a very credible tool of exerting political pressure on the ECB.
To summarize, the ECB can be described as an institution, the policies of which are not subject to any kind of approval or formal control by another political actor, the executives of which are extremely difficult to remove once they are in office, the goals and procedures of which depend to a significant extent on its own interpretation, and the competencies of which cannot be changed by passing a simple law. At the same time, this institution holds the sole authority to issue banknotes and to determine the interest rate for the whole Eurozone, which, in turn, influences economic growth, employment, inflation, and the foreign exchange rate.
In the face of an independence-power-ratio of this kind, it does not seem appropriate to choose Enderlein and Verdun’s (2009, p. 498) approach and reduce the discussion of the ECB’s democratic legitimacy to the mere statement that the ECB has a “democratic mandate through democratically mandated procedures and bodies.” Rather does it seem that Joseph Stiglitz (1998, p. 216) makes an important point by noting that “Monetary policy is a key determinant of the economy’s macroeconomic performance […]. That this key determinant of what happens to society – this key collective action – should be so removed from control of the democratically elected officials should at least raise questions.” Indeed, an institution which possesses the described combination of independence and power appears prima facie somewhat problematic in the context of a political system that bases itself on the principles of representative democracy.
3. An Undemocratic Institution?
However, the finding that the independence-power-ratio of the ECB raises questions in terms of democratic legitimacy does not necessarily imply that the institutional setup of the ECB inherently contradicts the established practice of democratic states. On the contrary, Bredt (2011, pp. 45-54) observes that in all EU member states, a personalised, representative understanding of democracy goes alongside with the existence of certain independent institutions, and Moravcsik (2002, pp. 605-606) points out that “the fact that governments delegate to bodies such as constitutional courts, central banks, regulatory agencies, criminal prosecutors, and insulated executive negotiators is a fact of life.” Nevertheless, this fact of life still calls for a careful theoretical justification, especially in the case of the ECB, in which independence goes exceptionally far.
A. Output Legitimacy
In their defence of ECB independence, Bini-Smaghi and Gros (2001) repeatedly mention the ECB’s “performance” and argue in terms of an “optimal” policy. What is underlying this argumentation is the attempt to justify ECB independence by policy-outcomes. Brentfort (1998, p. 110, emphasis in the original) illustrates this argument more clearly by noting that “Ultimately the Bank my lack social legitimacy and may exacerbate the democracy deficit when we consider the input side of democracy […]. However, on the output side of democracy the effectiveness of the Bank in achieving the goals of monetary policy may provide democratic self-determination […].”
According to the relevant economic literature there is, indeed, a reasonably strong empirical case for a direct connection between central bank independence and price stability in the sense that central bank independence reduces inflation (Alesina and Gatti 1995; De Haan and Eijffinger 2000; Ehrmann and Fratzscher 2011; Fischer 1995). However, Bellamy (2010) illustrates that policy output by itself is not sufficient to justify a policy in democratic terms. Scharpf (1997, p. 19) agrees by stating that “input-oriented authenticity and output-oriented effectiveness are equally essential elements of democratic self determination,” and demands that “political choices should be derived, directly or indirectly, from the authentic preferences of citizens.”
B. Principal-Agent Theory
A more promising approach to reconcile the independence of the ECB with the principles of representative democracy is based on Principle-Agent Theory. An approach of this kind succeeds in combining Enderlein and Verdun’s (2009, p. 498) argument of the “democratic mandate” with the output-related argument reviewed above. Principle-Agent Theory starts from the idea that “one actor (the principal) has an incentive to delegate power to another actor (the agent) with the expectation that subsequently the latter will act in a way which is consistent with the initial preferences of the former” (Elgie 2002, p. 187).
In the case of the ECB, this approach could be applied in the following way: The representatives of the people have a strong preference to keep inflation at bay, and they come to the conclusion that this preference can be more efficiently turned into policy-outcomes by a central bank that enjoys a high degree of independence. This conclusion can be based on the technical and complicated nature of the monetary policy domain, which requires a high degree of professionalism and expertise (Blinder 1997, p. 118; Jabko 2003, p. 728), on the sensitivity of the markets and the importance of operational details such as communication strategy (Lamla and Lein 2011; Sturm and De Haan 2011), and on the desire to shield the policy-making process from the seductive power of expansionary monetary policy’s short-term benefits which might be outweighed by corresponding risks in the long run.5 The empirical performance advantage of independent central banks as described above constitutes another important incentive, but is probably to a large extent the result of the other three factors. In any case, the decision by democratic representatives to delegate significant powers to a largely independent central bank in order to both stabilize policy preferences in the face of everyday policy-making and increase the efficiency of their implementation through independent expertise appears to be legitimate in terms of democratic principles.
However, this conclusion only holds as long as Blinder’s (1997, p. 123) condition that “delegated authority must be retrievable” is met, and there are two reasons for this. First, there is the possibility that the central bank uses its independence in a way that no longer corresponds to the initial preferences of the principal (Elgie 2002, p. 188). Second, it may be the case that a profound and fundamental change in policy preferences takes place. After all, inflation-averseness is not a law of nature but a political choice that can be called into question as Stiglitz (1998, pp. 210-216) demonstrates. Does this possibility to retrieve authority exist in the case of the ECB? From a legal perspective, the answer to this question has to be a clear yes. Theoretically, the member states are completely free to use the instrument of treaty revision in order to change the competencies of the ECB in any way they can agree on. Of course, it is likely to be rather difficult to reach a consensus of this kind in practice. Nevertheless, if there were the unanimous impression that the ECB was abusing its independence, or if there were the unanimous wish to fundamentally change the basic direction of monetary policy, it would be possible for the representatives of the people to take action.
Obviously, Principal-Agent Theory involves a trade-off between agency independence and retrievability. The former provides for the effectiveness of power delegation to the agency while the latter ensures its democratic legitimacy. It is, however, hardly possible to prescribe an optimal equilibrium in this trade-off from a theoretical point of view. As long as both agency independence and retrievability factually exist, the balancing act between them has to be left to the discretion of policy-makers. In the case of the ECB, these policy-makers seem to have chosen to provide the agency with a particularly high degree of independence by creating certain hurdles for retrievability. Nonetheless, these hurdles are not insurmountable, and, due to this fact, the ECB cannot be seen as inherently undemocratic.
C. Constitutionalist Theory
An alternative theoretical approach suitable to justify ECB independence is constitutional social contract theory as developed by James M. Buchanan. Bredt (2011, pp. 55-63) applies this theory to the case of the ECB. The approach differs from Principal-Agent Theory insofar as the empowerment of the ECB is not interpreted as a delegation process undertaken by political representatives, but as part of a social contract formed on the basis of a hypothetical consensusof society as a whole. This societal consensus elevates price stability to the position of a constitutional principle and installs the ECB as the independent guardian institution of this principle. Accordingly, the ECB gains a position similar to a court which safeguards the constitutional principle of the rule of law. Both institutions, although non-majoritarian, enjoy the same degree of democratic legitimacy as elected representatives, since they are part of the societal consensus reflected in the constitutional system.
Brentford’s (1998, p. 84) conclusion that “the legal texts underlying the Bank have been elevated to constitutional dignity” and Jabko’s (2003, p. 710) statement that ECB independence possesses “quasi-constitutional value” fit well into this constitutionalist perspective. However, the claim that price stability has acquired a position in European society that is comparable to the rule of law appears to be rather bold and could be disputed. Nevertheless, the constitutionalist approach represents a powerful alternative viewpoint on central bank independence and, if accepted, provides the ECB with a far more solid foundation of democratic legitimacy than Principle-Agent Theory does.
4. Enter Sovereign Bonds
The launch of the SMP in the context of the debt crisis was an impressive demonstration of the bandwidth of tools in the ECB’s possession. Art. 123 TEU prohibits the direct financing of member states’ sovereign debt, which is why the Bank had to purchase sovereign bonds on the secondary market by accepting them as a guarantee from banks in return for central bank money. So, basically overnight, the Bank decided to circumvent a treaty provision, extend its activities far beyond the field of traditional monetary policy, and enter an area of politics which hardly anybody had thought it would ever get involved in. Prior to the launch of the SMP, the political science literature had not paid any attention at all to the possibility that the ECB might start a programme of this kind. Not even those most concerned about the Bank’s alleged lack of transparency and accountability and its freedom to interpret its own tasks seemed to have considered this possibility. Nevertheless, in spite of the fact that it had not been anticipated by anybody, the purchase of sovereign bonds on the secondary market was an option entailed in the Bank’s legal mandate. The ECB is free to supply banks with money in exchange for bonds. Sovereign bonds are no exception from this principle, since Art. 123 TEU explicitly only prohibits their direct purchases. Accordingly, it was the independence given to the ECB by its mandate that allowed for the drastic expansion of its political activity.
A. Implications for Independence
However, as far as the consequences of the ECB’s actions for the Bank’s independence are concerned, the prevalent interpretation, which has also been widely echoed especially in the German media (Aumüller 2011; Jackisch 2011; Kaiser 2011), claims that “the ECB has become more dependent in political terms” (Belke 2010, p. 5), because “its leadership bowed to a politicization and intervened in the markets to buy the government bonds that no one else wanted” (Featherstone 2011). Apparently, this interpretation understands independence in terms of behavioural dissonance rather than in terms of institutional competencies. It assumes that the ECB would have to be uncooperative in order to preserve its independence, which does not make much sense. Naturally, the idea of central bank independence also has to include the possibility of an independent decision that conforms to policy-makers wishes, or even responds to insistent demands in the face of a serious crisis. As long as the decision-making process has not been subject to coercion, an ECB decision has to be viewed as independent – and those who argue that the ECB has lost independence fail to explain how, in the current situation, politicians have become able to influence the Bank’s decisions coercively by means that had not been available to them before. While it is certainly possible to interpret the ECB’s behaviour in different ways, a rather clear observation can be made that, from a legal point of view, the Bank has not lost any independence at all. Its decision-making procedures and institutional setup have not been changed in the slightest way. Consequently, the Bank is still the master of its own policies just like before the debt crisis, with the only difference being that it has assumed a new set of competencies.
B. Implications for Democratic Legitimacy
During the course of a guest lecture at the University of Siena in October 2011, the former president of the European Parliament, Josep Borell, discussed the role of the ECB in the debt crisis. He drew the picture of a central bank that, in the face of government inactivity, took the initiative in order to prevent public debt default and wrote letters to governments demanding constitutional provisions providing for a tighter fiscal policy as a precondition for further support. While he conceded that without the ECB’s intervention it might very well have come to a default, he emphasised that a central bank which prescribes government constitutional changes is quite problematic in regard to democratic principles.  
This analysis raises an important point. However, it overlooks that the ECB, after all, seems to have acted according to the Eurozone governments’ preferences. The ECB’s actions were certainly not uncontroversial. Criticism came from various sides, not only from the media, but even from within the Bank itself as the resignations of Bundesbank President Axel Weber and ECB Chief Economist Jürgen Stark clearly showed. However, no criticism came from those political decision-makers who were actually in charge of handling the crisis. To the contrary, it is widely believed that the ECB made its decisions in response to governments’ demands, as the above discussion of the Bank’s alleged independence-loss clearly shows. Furthermore, Müller et al. (2011) continue to argue that the bank is not comfortable at all with its new role as governments’ lender of last resort and that the mentioned strong-worded letter to the Italian government was a defensive tool to calm down critics within the ECB rather than a serious attempt to put pressure on Italy. Consequently, the more convincing conclusion seems to be that the Bank has assumed its new competency to buy sovereign bonds without great enthusiasm, but with the approval of the relevant political decision-makers. Accordingly, it could be argued that this increase in competencies simply represents another spontaneous case of power delegation in terms of the Principal-Agent approach and is thus unproblematic as far as the ECB’s democratic legitimacy is concerned. However, an efficiency-related argument in support of this delegation would be needed in order to justify it in this way, since the Principal-Agent model derives its legitimizing basis from gains in terms of efficiency (Alesina and Tabellini 2007, 2008; Elgie 2002; Majone 2001).
Essentially, sovereign bond purchases by the ECB have the same effect as sovereign bond purchases by the more affluent members of the Eurozone, or the issue of Eurobonds. They ease upward pressure on the bonds’ interest rate by spreading the cost of a default across the Eurozone and thereby decreasing the perceived risk. The reason for this is that, ultimately, the Eurozone members have to guarantee the capital of the ECB and will have to pay the price of a possible default out of their budgets if they do not want to resort to the money press and solve the problem through inflation (Belke 2010, pp. 5-6). However, it is not clear in which way the detour over the ECB makes this mechanism more efficient. Belke (2010, pp. 7-9) even argues that the SMP is, on the contrary, rather inefficient in terms of this goal. However, one efficiency-related argument that remains is the time factor. The ECB is clearly able to react faster than member state governments which first have to undergo comparatively lengthy coordination and decision-making procedures. Accordingly, power delegation to the ECB could be justified by the argument that it enables a rapid reaction to market forces and provides the political decision-making process with breathing space. This justification, however, would define ECB bond purchases as a short-term measure and would imply that governments are obliged to take over responsibility for the purchased bonds as well as for any further measures regarding collective guarantees for public debt at the earliest possible time.
From the constitutionalist perspective, however, there simply is no justification for the increase in the ECB’s competencies. The participation of the ECB in the struggle against the possible default of a Eurozone member through the purchase of bonds on the secondary market is not part of any legal document on which the institution is based, and neither has this possibility been part of the political discourse that surrounded the formation of the single currency. Although there do not seem to be any legal obstacles that prevent the ECB from acting in the way it does now, Belke (2010, p. 4) claims that the ECB, while not literally violating the treaty, “offended against its spirit as central bank bail-out of government deficits is prohibited.” The same argument was made by the president of Germany in a recent speech (Wulff 2011). So it seems that, as long as no changes are made to the ECB’s legal basis, the constitutionalist view has to be abandoned, which leaves Principal Agent Theory as the sole justification of the Bank’s democratic legitimacy in the face of the current developments.
5. Conclusion
It was the purpose of this essay to investigate the basis of the ECB’s competency to intervene in the sovereign bond market in the context of the debt crisis and to answer the question of whether this intervention can be justified in terms of democratic principles. It has been shown that the ECB gained the competency to buy sovereign bonds on a large scale through the extremely independent position provided by its mandate. This position has not been changed during the debt crisis. While the ECB is left with considerable freedom to define its own objectives and choose the tools to achieve them, the obstacles for political intervention into the Bank’s affairs remain very high. This means that the representatives of the people have delegated a significant share of political power to central bankers.
In general terms, this delegation of power can be justified both by Principal-Agent Theory and a constitutionalist approach. With reference to Principal-Agent Theory it can be argued, that the delegation of power in order to increase the efficient implementation of policy goals is common practice in any democratic system. It can further be argued that the Principal enjoys a considerable degree of discretion regarding the degree of independence granted to the implementing institution as long as there is the real possibility to retrieve the delegated competencies. The constitutionalist approach goes even further and interprets the Bank’s independence as part of the basic constitutional consensus of society, which gives the institution as much legitimacy as, for example, a constitutional court.
However, the constitutionalist approach fails when it comes to the legitimation of the sudden and entirely unanticipated acquisition of competencies by the Bank in the context of the public debt crisis. In this case, Principle-Agent Theory stands alone as a justification of the Bank’s actions, and is able to provide legitimacy only as long as the time advantage of the ECB’s decision-making capability in comparison to member state governments can be established as the rationale underlying the sovereign bond purchases. In summary, it can be said that, while the ECB can be generally seen as democratically legitimate in spite of its independence, this legitimacy rests on far weaker foundations when it comes to the Bank’s recent purchases of sovereign bonds. Therefore, it is important that governments resume the direct responsibility for sovereign debt at the earliest possible time and that the crisis-related measures of the ECB do not become common-practice without a formal political mandate preceded by a careful and open deliberation of risks and advantages.
[1] It is clear that the democratic legitimacy of the European Union as a whole is a complicated issue. Various cases have been made both for and against the existence of the famous democratic deficit (cf. for instance Bellamy 2010; Lindseth 1999; Moravcsik 2002). Unfortunately, a comprehensive review of this ongoing debate in order to clear the way for the analysis of a secondary EU institution like the ECB is not possible in the context of this essay. Accordingly, this essay will make an argument based on the assumption that the main decision-making organs of the EU enjoy a satisfactory degree of democratic legitimacy, because in the contrary case, there would not even be the need to ask for any democratic legitimacy of the ECB.
[2] Naturally, the analysis of an event as current and unprecedented as the crisis that is troubling the EU at the moment has to be based in some parts on sources of a journalistic, rather than a scientific nature, some of which might entail a certain degree of speculation, or subjective viewpoints based on personal impression. However, the only way to avoid this problem would be to conduct direct interviews with the decision-makers involved, which is neither possible in the context of this essay, nor likely to yield any useful results in the present situation, since it is highly doubtful whether those responsible for policy-making would be willing to play with open cards and reveal their true motives and preferences in a situation as tense as the present one.
[3]  Attached to the Treaties as Protocol No. 4.
[4] The Governing Council is the ECB’s main decision-making body, consisting of the Executive Board and the governors of the Eurozone’s national central banks.
[5] Blinder (1997, p. 122) compares this third consideration with Ulysses’ request to be tied to the mast while listening to the sirens, whereas Stiglitz (1998, p. 222) uses the metaphor of an alcoholic who “may recognize his weakness and turn over the key for the liquor cabinet to a friend.”
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Written by: Jakob Hauter
Written at: Universita degli Studi di Siena
Written for: Prof. Paul Corner
Date written: 10/2011


Bank on Democracy

In January, a new leading actor strode onto the world stage. More powerful than most national governments and responsible for helping to set the economic and political course for 280 million people and almost a quarter of the global economy, the European Central Bank (ECB) is notable for something more sinister as well -- its almost complete freedom from democratic oversight and control.
The ECB represents the culmination of two trends: European integration and central-bank independence. But while the potential drawbacks of the first trend have been analyzed endlessly, those of the second have gone almost entirely unremarked. Leaving central banks undisturbed by their host governments has become an integral part of the neoliberal catechism. In fact, however, the case for removing such powerful institutions from democratic oversight is unproven. Allowing it to rest unchallenged both damages democracy and begs important questions about who the winners and losers of economic policy should be.
The ECB will be responsible for setting interest rates and managing Europe's new currency, the euro. The bank's decisions will affect economic development across an entire continent and help determine whether European integration succeeds. Yet the officials who make these decisions will not have to answer to the publics whose jobs and quality of life hang in the balance. The bankers will not even have to give Europeans much basic information on how and why bank decisions are made. To make matters worse, the bankers' priorities are essentially set in stone; the Maastricht Treaty itself gives the ECB the narrow mandate of keeping prices stable.
All this runs counter to a recent and much-vaunted global trend: the transfer of power from authoritarian elites to democratic publics. Few have protested this inconsistency, however. In a perverse twist, the insulation of central banks from popular control has become one of the chief contemporary signifiers of liberalism. In a secular version of Lent that is now the rage from Europe to Latin America to the post-Soviet bloc, democratic governments are proving their faith and virtue by giving up something dear -- the ability to control their countries' economic destinies.
Exemplifying this trend, more countries increased the independence of their central banks during the 1990s than during any other decade since World War II. The wave swept five continents, engulfing countries as diverse as Albania and Sweden, Kazakhstan and New Zealand. Crucial support has come from an ideological consensus among the world's business and economic elites. The Financial Times, for example, has argued that the arguments "for central bank independence appear overwhelming," while The Economist has declared that "The intellectual case for independent central banks [has been] more or less won." Yet the arguments used to justify removing monetary policy from democratic control do not survive close scrutiny.
Advocates of central-bank independence defend it in two related ways. The first is theoretical and justifies treating monetary policy differently from other kinds of policy because of its supposed special characteristics. The second is practical and justifies treating monetary policy differently because so doing supposedly produces important economic benefits. Neither argument holds up.
According to supporters of central-bank independence, monetary policy cannot be entrusted to normal policymaking processes because it is complicated and requires a disciplined, long-term perspective to succeed. Since ordinary people and politicians cannot understand the intricacies of what central banks actually do, the argument goes, they cannot adequately weigh particular policy choices. They are also unable to think far into the future or accept pain now for gain later. (This latter point relates to what economists refer to as the "time inconsistency" problem.) So decision-making in this area needs to be handed over to wise men who will do for the people what they cannot do for themselves. As Alan S. Blinder, a Princeton economist, recently put it,
"First, . . . monetary policy is a somewhat technical field where trained specialists can probably outperform amateurs from the political realm. Second, the effects of monetary policy take a long time to filter through the economy, so good policy decisions require patience and a long time horizon -- two attributes not normally associated with politicians. Third, the pain of fighting inflation (higher unemployment for a while) comes well in advance of the benefits (permanently lower inflation). So short-sighted politicians with their eyes on elections would be tempted to inflate too much."
At first glance, these arguments appear plausible. Monetary policy is indeed complicated and confusing; politicians and publics do often view it with a short-term perspective; and political actors do frequently shrink from prescribing bitter medicine for fear of paying an electoral price. But these qualities characterize almost all policy areas. Indeed, the more important an issue is, the more likely these conditions are to hold. Isn't health care incredibly complicated? Who really is qualified to decide how much funding should go to different types of medical research? Does anybody truly believe that members of Congress or their constituents fully understand the various plans being bandied about for changing Social Security? How many Americans even understand how the present system works? Presumably most would agree that decisions about something as important as Social Security should be made to benefit all Americans rather than a narrow lobby like the American Association of Retired Persons. Add welfare reform, tax policy, foreign policy -- the list is endless. The sad fact is that policymaking in countless areas is often driven by short-term considerations or by the needs of powerful but parochial special interest groups. Monetary policy is simply not that distinctive and need not be treated differently. Blinder is honest enough to admit this squarely and bold enough to ask whether much national policy should not therefore be delegated to independent technocrats. Anyone unwilling to go so far should be prepared to let monetary policy be just as subject to democratic control as everything else.
The second rationale for central-bank independence is strictly practical. Such independence, we are told, produces better overall economic outcomes. In return for freedom from political control, central bankers will provide their societies with major, widespread economic benefits -- in theory. But here too the evidence is unconvincing. Reflecting an almost universal finding, Alberto Alesina, a Harvard political economist, and Lawrence H. Summers, his erstwhile colleague turned deputy treasury secretary, noted in a 1993 survey that central-bank independence "has no measurable impact on real economic performance." In plain English, taking control of a country's central bank away from politicians and giving it to technocrats is likely neither to raise economic growth nor to lower unemployment.
The sole area where Alesina, Summers, and others have detected a possible boon from central-bank independence is in fighting inflation. Even this finding, however, is not as powerful as it appears at first glance. To begin with, the strength of the correlation between central-bank autonomy and lower inflation depends on the criteria used to measure independence, the time period chosen, and -- especially -- the countries included in the sample. If one looks at developing countries as opposed to advanced industrial ones, the positive impact of central-bank independence on inflation simply disappears. This should hardly be surprising, both because politics in developing countries is often guided by informal rules rather than laws and formal procedures and because such countries lack the range and depth of institutions necessary for full policy implementation and coordination. Even in advanced industrial countries, where the correlation between central-bank independence and lower inflation seems strongest, the case is not clear-cut. Some argue, for example, that the correlation is spurious. Thus Adam Posen of the Institute for International Economics claims that "differences in central bank autonomy and reputation are not the sources of inflation differences among the advanced industrial countries. . . . [A]ll the published arguments used to trace a causal link between [central bank independence and low inflation] are not borne out by economic reality." What really matters in the long-term struggle against inflation, Posen finds, is a strong financial sector that is interested in price stability and that is willing and able to influence policymaking to get it. Central-bank independence and lower inflation, in this view, are linked not because one causes the other but rather because both are caused by the political effectiveness of a particular coalition of interests.
Other scholars have come to similar conclusions, noting that independent central banks have little positive long-term impact on inflation unless backed by a societal consensus on the need for stable prices. Students of Germany, for example, have argued that the real source of the Bundesbank's effectiveness is not its statutory independence but rather widespread public acceptance of the need to make fighting inflation a primary economic-policy goal.
The evidence about the economic impact of central-bank independence, therefore, is decidedly mixed. Such independence has not been shown to produce higher growth or lower unemployment, and its effect on inflation is debatable. Moreover, during economic downturns, independent central banks may actually make things worse. Many studies have, for example, linked greater central-bank independence to larger drops in output during recessions. Furthermore, as the economists Sylvester C. W. Eijffinger and Jakob De Haan note, "most studies suggest that central bank independence is associated with higher disinflation costs." In light of all this, one might think that economists and other elites would pause before insisting that central-bank independence is indispensable. Yet the opposite is true. Seizing on the fact that central-bank independence is on average associated with lower inflation (which most advocates of independence cherish) but has few apparent effects (and therefore costs) in other economic areas, economists have concluded that, in the words of Vittorio Grilli, Donato Masciandaro, and Guido Tabellini, "having an independent central bank is almost like having a free lunch." But as economists more than anyone else should know, there is no such thing as a free lunch.
What has been overlooked in the rush to make central banks independent is the fact that such political insulation does come at a price -- although not the kind easily measured by slide rules or calculators. By turning over monetary policy to unelected and often unaccountable technocrats, countries surrender much control over their economic fates. Even if the practical benefits of doing so were clear, abdicating such authority would be a grave decision, worth taking only after full national debate. Since the benefits are at best questionable, fully insulating monetary policy from government control regardless of the particular national or economic context could have dire consequences.
The great conceit of the early post-Cold War era was that all good things came together in one package: Free politics (democracy) and free markets (capitalism) were complementary, and the formula for lasting success was open to all. As the world economy has faltered in the late 1990s, however, many have begun to think that these two halves of the liberal order may in fact pull in opposite directions. In both developed and developing countries, more and more people see globalization as a threat and believe they are paying too high a price to satisfy the demands of international capital and finance. Given this backdrop, additional and largely unnecessary losses of popular sovereignty would be counterproductive or even dangerous.
Globalization has played a large role in convincing many countries to free their central banks from political control. Powerful financial and business elites have a greater interest in conservative monetary policy and price stability than other groups like workers, and countries have crafted policies to satisfy the demands of highly mobile international and domestic investors. As Sylvia Maxfield of the Harvard Institute for International Development has put it, "Foreign investors read central bank independence as a signal of the strength of domestic proponents of sound monetary policy, both within the government and among domestic interest groups, with whom the investors might implicitly or explicitly ally in an effort to influence policy."
This type of dynamic is hardly restricted to developing countries; concerns about credibility drove the decision to make the ECB the most independent central bank in the world. The extreme independence of the ECB is meant to reassure financial and business elites that price stability will trump other economic goals and that Europe's economic policy will be appropriately insulated from the demands of labor and other domestic interest groups. The decisions to free Europe's central bank from political control and to focus narrowly on fighting inflation, in other words, were not "technical" or "apolitical," as most advocates of independence argue. Rather, as with all difficult policy choices, they involved painful tradeoffs that will benefit some more than others.
The plans for the bank were drawn up during a period of low inflation combined with rising unemployment and slow growth in Europe -- hardly conditions under which an unprecedented degree of central-bank independence and a narrow focus on price stability are obviously correct prescriptions. An increasing number of European politicians have argued that broadening the mandate of the ECB to include growth and employment would help increase the bank's legitimacy -- and that of the European Union more generally -- without reigniting inflation. Yet these concerns are scorned rather than scrutinized because the Maastricht Treaty states that the ECB cannot seek or take instructions from any EU member government. Wim Duisenberg, the ECB's head, recently remarked that while it was "normal" for politicians to voice their thoughts about monetary policy, it would be "abnormal if those suggestions were listened to." Worse, the ECB's statutes and mandate can be modified only by the unanimous consent of all member states. Even the mighty Bundesbank does not enjoy such freedom; the law governing it can be changed by a simple parliamentary majority.
Adding insult to injury, the ECB's regulations require practically no transparency at all. While developing nations are being told by the West that openness and transparency are indispensable elements of well-functioning modern economies, some of the most advanced industrial nations are walling off crucial economic decision-making processes from public scrutiny. As Joseph Stiglitz, the chief economist at the World Bank, has noted, "transparency -- openness -- is now recognized as a central aspect of democratic processes. There cannot be effective democratic governance without information. Yet central banks continue to operate in secrecy." There are clearly some good reasons for closed deliberations, such as the difficulties of governing the eurozone collectively if national central-bank governors' positions on sensitive topics were revealed. But the existing setup smoothes the bankers' dealings with one another at the expense of public trust. It will also exacerbate tensions between European monetary policy and national economic policies and cycles.
As Talleyrand famously remarked of a Napoleonic-era covert action, this is worse than a crime, it is a blunder -- and a blunder that may well come back to haunt the advocates of European unity who pressed so hard for the ECB in the first place. European integration has thus far been primarily driven by elites. European publics have been skeptical about losing sovereignty and about the generally undemocratic nature of European institutions. The ECB will be one of the most important of these institutions, and its decisions will have major consequences for Europe's economic and political life. Even when times are good, some people will pay significant costs because of choices the ECB makes; when times are bad, the some will become the many, and anger will grow. If the bank's decision-making processes were reasonably transparent and open to democratic oversight, the pain could perhaps be explained and justified. Under the current regime, however, bitter and restive publics may get nothing but dismissive hauteur. The result will be further widespread alienation from the entire European project.
What advocates of the ECB in particular and economists in general seem to have forgotten in the rush for economic efficiency is the power and import of democracy. The essence of democracy is not primarily the outcomes it produces but the process by which those outcomes are reached and legitimated. True democrats believe that government should be not only of and for the people but also by them. Even the most thoughtful advocates of central-bank independence seem to have forgotten this -- something captured by the tone Blinder uses to describe the differences between decision-making at the Council of Economic Advisors and at the "apolitical" Federal Reserve. In the former, he writes,
" . . debate quickly turns to such cosmic questions as whether the chair of the relevant congressional subcommittee would support the policy, which interest groups would be for it and against it, . . . [and how it] would play in Peoria. . . .
At the Federal Reserve, on the other hand, . . . policy discussions are serious, even somber, and disagreements are almost always over a policy's economic, social, or legal merits, not its political marketability. . . . The attitudes of particular legislators, interest groups, or political parties toward monetary policy are rarely mentioned, for they are considered irrelevant.
Such disdain for democratic policymaking has familiar echoes. Tocqueville famously questioned America's ability to conduct a successful foreign policy because of the tendency of a democracy to "obey its feelings rather than its calculations and to abandon a long matured plan to satisfy a momentary passion." George F. Kennan went so far as to advocate the "use of the principle of professionalism in the conduct of foreign policy" across-the-board for fear of decision-makers "beholden to short-term trends in public opinion . . . [and] what we might call the erratic and subjective nature of public reaction to foreign policy questions."
The skeptics, however, have been proven wrong. Time and again, in wars hot and cold, democracy as a system has consistently beaten its competitors -- not despite having decision-makers accountable to their publics, but largely because of it. Openness and democratic control sometimes produce mistakes and embarrassment, but on balance they also produce moderation, success, and -- most important -- legitimacy. These are precisely the qualities that Europe's economic policy needs in the decades ahead. Unless the continent's elites and central bankers can bring themselves to trust their publics more, however, these may be qualities in short supply.