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: European Macroeconomics & Governance

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 More on this topic

Blog Post

Inflation targets: revising the European Central Bank’s monetary framework

The ECB is looking to evaluate whether its definition of price stability is effective in helping anchor inflation expectations. We argue that the current definition does not make for a very good focal point. To become a focal point the ECB needs to do two things. Price stability should be defined as inflation at 2 percent,. Remove therefore the unnecessary ambiguity of "below but close to 2 percent". But that is not enough. Around that 2 percent, the ECB should say which levels of inflation it is prepared to tolerate. There need to be explicit bands defined around that 2 percent to provide a framework for economic agents to evaluate Central Bank performance. And as the ECB will have to operate under high levels fo uncertainty these bands need to be wider than tolerance of inflation between 1 and 3 percent, which is what many inflation targeting Central Banks have tolerated over the years.

By: Maria Demertzis and Nicola Viegi Topic: European Macroeconomics & Governance Date: February 20, 2020
Read article More on this topic More by this author

Blog Post

The EU’s poverty reduction efforts should not aim at the wrong target

The EU cannot meet its ‘poverty’ targets, because the main indicator used to measure poverty actually measures income inequality. The use of the wrong indicator could lead to a failure to monitor those who are really poor in Europe, and a risk they could be forgotten.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 18, 2020
Read article Download PDF More on this topic

Policy Contribution

FDI another day: Russian reliance on European investment

Most foreign direct investment into Russia originates in the European Union: European investors own between 55 percent and 75 percent of Russian FDI stock. This points to a Russian dependence on European investment, making the EU paramount for Russian medium-term growth. Even if we consider ‘phantom’ FDI that transits through Europe, the EU remains the primary investor in Russia. Most phantom FDI into Russia is believed to originate from Russia itself and thus is by construction not foreign.

By: Marta Domínguez-Jiménez and Niclas Poitiers Topic: Global Economics & Governance Date: February 17, 2020
Read about event

Upcoming Event

Mar
31
12:30

How adequate is the European toolbox to deal with financial stability risks in a low rate environment?

Bruegel is delighted to welcome the governor of the Central Bank of Ireland, Gabriel Makhlouf. He will deliver a keynote address about how adequate the European toolbox is to tackle financial stability risks in a low rate environment. Following his speech, a panel of experts will further discuss the topic.

Speakers: Gabriel Makhlouf, Guntram B. Wolff and Agnès Bénassy-Quéré Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF

Policy Contribution

European Parliament

From climate change to cyber attacks: Incipient financial-stability risks for the euro area

The European Central Bank’s November 2019 Financial Stability Review highlighted the risks to growth in an environment of global uncertainty. On the whole, the ECB report is comprehensive and covers the main risks to euro-area financial stability, we highlight issues that deserve more attention.

By: Zsolt Darvas, Marta Domínguez-Jiménez and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: February 6, 2020
Read article More by this author

Opinion

Europe’s banking union must be cyberproofed

The EU urgently needs to conduct joint preparedness exercises and create uniform information and disclosure requirements that help build a true pan-European insurance market for cyber risks

By: Guntram B. Wolff Topic: Finance & Financial Regulation, Innovation & Competition Policy Date: January 30, 2020
Read about event More on this topic

Past Event

Past Event

Take a chance on me: Sweden considers the Banking Union

This event will discuss if Sweden should join the European banking union and the general state of the union.

Speakers: Fredrik Bystedt, Elena Carletti, Maria Demertzis and Pawel Gąsiorowski Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 29, 2020
Read article More on this topic

Blog Post

Libra as a currency board: are the risks too great?

The Libra Association claims it will be analogous to a currency board regime, but they have overlooked the problems of monetary management that come with it

By: Julia Anderson and Francesco Papadia Topic: Innovation & Competition Policy Date: January 27, 2020
Read article More on this topic

Blog Post

A European anti-money laundering supervisor: From vision to legislation

In fighting anti-money laundering, the European Commission should act fast toward creating a central supervisory authority.

By: Joshua Kirschenbaum and Nicolas Véron Topic: European Macroeconomics & Governance Date: January 24, 2020
Read article More on this topic More by this author

Opinion

European capital markets union, by rule and by choice

While the euro is now a leading global currency and the European Central Bank has become a comprehensive banking supervisor, Europe’s markets have been treading water.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: January 23, 2020
Read about event

Past Event

Past Event

The state of health in the EU and the digitalisation of health promotion

The panellists at this event reviewed the general state of health as well as the digitalisation in the industry.

Speakers: Stefania Boccia, Caroline Costongs, Katarzyna Czabanowska, Zsolt Darvas, Guillaume Dedet, Martin Dorazil, Josep Figueras, Joanna Kokot, Martin Seychell and Michael Strübin Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 22, 2020
Read about event More on this topic

Past Event

Past Event

Partnering with Europe on responsible AI: a conversation with Sundar Pichai, CEO Google and Alphabet

At this event, Google's and Alphabet's CEO Sundar Pichai will elaborate on his views on Artificial Intelligence.

Speakers: Sundar Pichai and Guntram B. Wolff Topic: Innovation & Competition Policy Location: SQUARE, Mont des Arts, 1000 Brussels Date: January 20, 2020
Load more posts