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: , , , , , , and Date: April 22, 2021 Topic: European governance

The ECB is facing a paradox. On the one hand, the ECB has failed to achieve its price stability mandate, as inflation has been below 2% for the past decade. And despite this blatant failure, the ECB is now thinking about doing more than just looking after stable prices. For instance, Christine Lagarde has been raising expectations that the ECB will take concrete action against climate change when completing the ECB’s strategy review.

In theory, the European Treaties already confer large power to the ECB to act on other goals than its primary mandate of price stability. Article 127 TFEU stipulates that without prejudice to price stability, the ECB “shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union.”

Over the years, this Treaty provision has often been mentioned by those who want to push the ECB to act  in various directions. Typically, trade unions want the ECB to pursue  full-employment more forcefully, while NGOs wish the ECB would do more to fight climate change or inequality. As a matter of fact, the breadth of objectives mentioned in Article 3 of the TEU – ranging from security, equity and economic growth to environmental protection, innovation and many other laudable EU objectives – opens the door to an infinite number of possible objectives for the ECB.

To some extent, such flexibility is useful and convenient. It leaves the door open to all possible winds of changes. But at the end of the day, too much vagueness is also leading to inaction. Indeed, by cutting through the vagueness and explicitly justifying its monetary policy stance based on a secondary objective, the ECB would be perceived as making political decisions, and hence prefers to stay away from that.

The neglect of the secondary objectives is understandable when considering that the ECB mandate is blank on guidance on how these secondary objectives should be ranked and attained. The ECB suffers from “democratic authorisation gaps”, i.e. the drafters’ failure to foresee the situations the ECB currently finds itself in: having to decide between different goals and tools that all have far-reaching consequences beyond what the Treaty writers anticipated.

While the ordering is clear between the ECB’s primary price-stability mandate and its supervisory duties, whether and how the ECB should act on its secondary objectives is much more blurred and subject to difficult trade-offs. Should the ECB favour jobs or climate? Sometimes using different tools to achieve different objectives could be possible but sometimes it is not the case. Dealing with such trade-offs is inherently a political task and the ECB should welcome some explicit guidance on which secondary objectives are the most relevant for the EU in a particular situation. As former ECB Board member Benoit Cœuré once said: “Setting priorities between different objectives is the definition of policy […] and that is what parliaments do”.

This is why, to add legitimacy for the ECB acting on its secondary objectives, a formal procedure involving both the Council and the European Parliament should be developed in order to specify and prioritise the policy areas where the ECB would be expected to deliver.

In practice, the existing channels of accountability between the European Parliament and the ECB already provide a conduit for such prioritisation. The Parliament could use its annual resolutions on the ECB to vote a ranking of three top secondary objectives, and could choose to refocus the quarterly “monetary dialogues” hearings with the ECB President to carry out regular checks on the delivery of the thus-interpreted mandate.

In this manner, the ECB would receive renewed legitimacy for an expanded set of goals. It could work efficiently, deploying its full toolkit towards a clear and politically defined set of policy objectives, guided by democratic institutions.

The ECB’s mandate was established three decades ago, when none of the current challenges were foreseen. It is therefore only natural that the ECB’s mandate today is subject to different and sometimes contradicting interpretations across the euro area. While the European Court of Justice has a role to play in identifying safeguards and limits to ensure that the ECB respects the boundaries set by the EU Treaties, it should not decide in the place of elected policymakers on the future orientations of the ECB’s mandate.

The European Parliament has taken an important step in December 2020 by requesting to put in place an inter-institutional agreement on the ECB’s accountability framework – which to date is largely informal. The upcoming negotiations between the ECB and the Parliament, alongside the ongoing strategy review of the ECB, offer a unique opportunity to enhance a strong accountability process directly with the ECB, in full respect of its independence.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More by this author
 

Opinion

European governance

Can EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
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: Petra Geraats, Wolfgang Lemke and Francesco Papadia Topic: Macroeconomic policy
Read about event More on this topic
 

Upcoming Event

Nov
9
11:00

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Maria Demertzis and Laurie Mayers Topic: Macroeconomic policy
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 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 by this author
 

Opinion

European governance

The inconsistency in global strategic relations

All of this talk on strategic retrenchment and autonomy is the language of escalation, not of appeasement and collaboration.

By: Maria Demertzis Topic: European governance, Global economy and trade Date: October 13, 2021
Read article More by this author
 

Blog Post

European governance

Pandemic prevention: avoiding another cycle of ‘panic and neglect’

Agreement is needed at international level on mechanisms to ensure better preparedness for the next pandemic.

By: Anne Bucher Topic: European governance, Global economy and trade Date: October 7, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Opinion

Inclusive growth

For remote work to work, new ground rules are needed

The pandemic has shown workers and employers that another way to work is possible. The European Union should develop a framework to facilitate hybrid work.

By: Mario Mariniello Topic: Inclusive growth Date: September 23, 2021
Read article
 

External Publication

European governance

EU-India trade relations: assessment and perspectives

In-depth analysis prepared for the European Parliament's Committee on International Trade (INTA).

By: Suman Bery, Sonali Chowdhry, Alicia García-Herrero and Niclas Poitiers Topic: European governance, Global economy and trade Date: September 10, 2021
Read article Download PDF
 

Policy Contribution

European governance

A green fiscal pact: climate investment in times of budget consolidation

Increasing green public investment while consolidating deficits will be a central challenge of this decade. A green fiscal pact would address this tension, but difficult trade-offs remain.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: September 9, 2021
Read about event
 

Past Event

Past Event

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European governance, Macroeconomic policy Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Load more posts