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 about event More on this topic
 

Upcoming Event

Sep
2
14:15

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: Finance & Financial Regulation Location: PALAIS DES ACADEMIES, RUE DUCALE 1
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: European Macroeconomics & Governance Date: July 7, 2021
Read article More on this topic More by this author
 

Opinion

What to expect from the ECB’s monetary policy strategy review?

Emphasis will be placed on greening monetary policy and clarifying the ECB's price stability objective, but is this enough?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: June 23, 2021
Read article More on this topic More by this author
 

Blog Post

Inflation!? Germany, the euro area and the European Central Bank

There is concern in Germany about rising prices, but expectations and wage data show no sign of excess pressures; German inflation should exceed 2% to support euro-area rebalancing but is unlikely to do so on sustained basis.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 9, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

What Are the Effects of the ECB’s Negative Interest Rate Policy?

This paper explores the potential effects (and side effects) of negative rates in theory and examines the evidence to determine what these effects have been in practice in the euro area.

By: Grégory Claeys Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: June 9, 2021
Read article More on this topic
 

Blog Post

Emergency Liquidity Assistance: A new lease of life or kiss of death?

Use of Emergency Liquidity Assistance to prop up euro-area banks needs to be more transparent; available evidence suggests its use has not always been within the rules.

By: Francesco Papadia and Leonardo Cadamuro Topic: European Macroeconomics & Governance Date: May 28, 2021
Read article More on this topic More by this author
 

Opinion

Europe must fix its fiscal rules

The pandemic has shown that the EU’s spending framework reflects an outdated economic orthodoxy.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: May 27, 2021
Read about event More on this topic
 

Past Event

Past Event

After COVID-19: a most wanted recovery

This event, jointly organised with ISPI, as the National Coordinator and Chair of the T20 Italy, is part of the T20 Spring Roundtables and it will focus on strategies for a swift and sustainable economic recovery for Europe.

Speakers: Franco Bruni, Maria Demertzis, Elena Flores, Paul De Grauwe, Christian Odendahl, Miguel Otero-Iglesias and André Sapir Topic: European Macroeconomics & Governance Date: May 19, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A stronger euro comes with more responsibility

What does strategic sovereignty mean to and for Europe?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 19, 2021
Read article More on this topic
 

Opinion

The ECB needs political guidance on secondary objectives

While EU Treaties clearly stipulate that the ECB “shall support the general objectives of the European Union”, it is not appropriate to simply stand by, wishing that the ECB will use its discretionary power to act on them. Political institutions of the EU should prioritise the secondary goals to legitimise the ECB’s action.

By: Pervenche Béres, Grégory Claeys, Nik de Boer, Panicos O. Demetriades, Sebastian Diessner, Stanislas Jourdan, Jens van ‘t Klooster and Vivien Schmidt Topic: European Macroeconomics & Governance Date: April 22, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Africa's battle with COVID-19

How can we ensure a worldwide balanced and inclusive recovery from the Covid pandemic?

By: The Sound of Economics Topic: Global Economics & Governance Date: April 21, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

The idea of Europe: more than a feeling?

What can 70 years of news(paper articles) and how we talk about 'Europe' tell us about pan-European identity? Is there even such a thing as a European public sphere?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: April 16, 2021
Load more posts