Blog Post

The Eurosystem – Too opaque and costly?

The Eurosystem gets a lot of attention from academics and the media, but they largely focus on its statutory objective of maintaining price stability. There is much less interest in its transparency and operational efficiency. We analyse these issues, and find that the Eurosystem is less transparent and operates with significantly higher costs and headcount than the US Federal Reserve System.

By: and Date: November 6, 2017 Topic: Macroeconomic policy

This blog post is based on a report that was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 25 September 2017 between ECON and the President of the ECB.

The European Central Bank (ECB) and the Eurosystem face a lot of scrutiny when it comes to monetary policy, but their operational performance attracts less attention. Still, being a public institution, the ECB and the 19 National Central Banks (NCBs), which together form the Eurosystem, have to justify their methods and costs. Thus, this blog post will assess the decentralised implementation of monetary policy by the Eurosystem with particular emphasis on its transparency, operational efficiency, and simplicity. When appropriate, we compare the Eurosystem to its most similar counterpart, the Federal Reserve System (Fed) of the United States.

Transparency

Despite some recent improvements (see Table 1), the ECB’s transparency falls behind the Fed on core monetary policies.

In fact, while the ECB discloses quite substantial (albeit yet not complete) information on its liquidity management (MRO, LTRO, TLTRO), it is much less transparent about its quantitative easing programs. In contrast to that, the Fed publishes more data about the current state of its quantitative easing programmes and even discloses a complete transaction log with a delay of two years.

The Eurosystem also provides very little information regarding its Emergency Liquidity Assistance (ELA). Again, the Fed is more transparent by publishing current amounts as well as historic transactions (with a 2-year delay). Table 2 provides a summary comparison between the Eurosystem’s and the Fed’s transparency in important operations.

Table 2: Information provided by the Eurosystem and the Fed for selected operations

In addition, substantial parts of the information presented by the ECB (and the NCBs) are user-unfriendly and difficult to process for further analysis.

Operational Efficiency

The term efficiency describes the amount of resources used to reach a certain goal. Unlike the case of a company, where revenues and costs can be compared, there is no straight-forward metric to assess the efficiency of a central bank. Thus, we decided to assess the Eurosystem’s operational efficiency by analysing its operational costs against its tasks.

Based on figures published in the annual reports of the ECB and the 19 NCBs, we estimate that the Eurosystem has aggregate operational costs of about €10 billion, of which close to €1 billion is generated by the ECB (in 2016). The total staff size of the Eurosystem and the ECB amounts to over 48,000 and 3,100 units respectively. Compared to the Fed, the Eurosystem employs almost twice as many people (Figure 1) and has operational costs that are twice as high as those of the Fed.

Figure 1: Population and NCB headcounts (2016)

Source: ECB and NCBs’ websites; Fed Annual Report (2016); World Bank
Notes: Both axes are shown on a logarithmic scale.

Of course the Eurosystem’s and the Fed’s tasks are not totally comparable, but it is still sensible to assume that the costs of the Eurosystem are considerable higher due to its institutional structure. The Eurosystem consists of 19 NCBs and the ECB while the Fed consists of 12 Federal Reserve Banks, the Board of Governors, and the Federal Open Market Committee.

Simplicity

 Based on the European treaties, the Eurosystem implements its monetary policy in a decentralised way. Compared to a centralised implementation, as seen with most central banks, the Eurosystem’s implementation is inherently more complex.

Table 3 gives an overview of which NCB is responsible for implementing which quantitative easing programme of the ECB. As depicted in the table, the set of NCBs is different depending on the programme, and no clear pattern of implementation can be deducted. On top of this, the Eurosystem does not disclose the decision rule that led to the above-mentioned scattered implementation.

The Fed has a far simpler implementation structure. All monetary policies, decided by the Federal Open Market Committee, are implemented by the Federal Reserve Bank of New York.

Recommendations

Based on our analysis, we can identify several ways in which the ECB and Eurosystem could improve transparency and efficiency.

Regarding transparency, we suggest that the Eurosystem should take the Fed as an example and disclose more information on its monetary operations. If information contains sensitive material, we suggest releasing the information with a delay.

To increase transparency and strengthen accountability, the ECB and the eurozone NCBs could disclose full information on operational cost and staff headcounts, disaggregated by unit and function. We believe that silos between the NCBs should be broken up and that the ECB should serve as a data portal for the whole Eurosystem. Thus, we suggest that the ECB collects data about monetary operations as well as costs from all 19 NCBs and publish this data on the ECB’s website in a coherent form. If this is not feasible, we propose that the ECB should publish a common annual report of the Eurosystem that contains the most crucial information on costs and headcount of the entire Eurosystem (inspired by the Fed).  We suggest that the Eurosystem publishes its reports at least in a harmonised way/design.

The operational efficiency of central banks is hard to measure, as it is not clear to which metric its cost should be compared. But our estimates, however rough, suggest that the Eurosystem is costlier than the Federal Reserve. This is not surprising as the Eurosystem is more decentralised than the Fed. Thus, we recommend bundling more (monetary) policy actions on a lower number of central banks. In addition, we suggest continuing to reduce the Eurosystem’s costs, which will imply a reduction of staff numbers, intensifying the action pursued over the last few years.

The decentralised nature of the Eurosystem, as established by the European treaties, creates a certain degree of intrinsic complexity. Therefore, a simple and centralised implantation of monetary policy would not be in line with the treaties. However, we argue that the Eurosystem could achieve more simplicity in the current treaty regime by assigning certain functions to certain NCBs in a systematic manner (specialised NCBs). In addition, we strongly suggest that the Eurosystem discloses information on its decision rules on implementation.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read about event
 

Upcoming Event

Nov
2
14:00

Microchips and Europe's strategic autonomy

Per microchips ad strategic autonomy.

Speakers: Piotr Arak, Alicia García-Herrero, Jay Lewis and Niclas Poitiers Topic: Digital economy and innovation, European governance
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Grégory Claeys and Wolfgang Lemke Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Unboxing the State of the Union 2021

In this Sound of Economics Live episode, Bruegel experts look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

By: The Sound of Economics Topic: Macroeconomic policy Date: September 15, 2021
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Unboxing the State of the Union 2021

In this Sound of Economics Live episode, we look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

Speakers: Grégory Claeys, Maria Demertzis, Alicia García-Herrero and Giuseppe Porcaro Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 15, 2021
Read article More on this topic More by this author
 

Opinion

EU climate plan should involve taxing pollution, not borders

Climate change and taxes may be some of the only true certainties in life. To protect ourselves better, we should make careful choices on how they interact.

By: Rebecca Christie Topic: Green economy Date: September 6, 2021
Read about event More on this topic
 

Past Event

Past Event

Monetary and macroeconomic policies at the crossroads

Bruegel Annual Meetings, Day 2- In this session we would like to discuss monetary and macroeconomic policies after Covid-19.

Speakers: Grégory Claeys, Per Callesen, Gita Gopinath, Jorge Sicilia Serrano and Lawrence H. Summers Topic: Banking and capital markets Location: PALAIS DES ACADEMIES, RUE DUCALE 1 Date: September 2, 2021
Read article More on this topic
 

Blog Post

How have the European Central Bank’s negative rates been passed on?

Negative rate cuts are not that different from ‘standard’ rate cuts. Like them, they reduce banks’ margins, but this effect does not appear to be amplified below 0%.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: Macroeconomic policy Date: July 7, 2021
Load more posts