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 Macroeconomics & 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 about event More on this topic
 

Upcoming Event

May
26
12:00

Conference on the Future of Europe: Vehicle for reform versus forum for reflection?

At this policy dialogue organised by the research project EU3D, 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 and their patterns, including preliminary findings on national parliamentary debates.

Speakers: Sergio Fabbrini, John Erik Fossum, Magdalena Góra, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Past Event

Past Event

Covid-19 and the geopolitics of the Balkans

How have China, Russia, Turkey and others stepped up their activities in the Balkans at a time when the prospect of enlargement is diminished?

Speakers: Michael Leigh, Pierre Mirel, Aleksandra Tomanić, Justyna Szczudlik and Catherine Wendt Topic: Global Economics & Governance Date: April 29, 2021
Read article More by this author
 

Opinion

We need more bias in artificial intelligence

What makes one vision more desirable than another is not its neutrality, but whether it can better serve one’s goals in the context of where those goals are being pursued.

By: Mario Mariniello Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: April 21, 2021
Read article
 

Blog Post

Urgent reform of the EU resolution framework is needed

In this blog, the authors argue that two aspects of the European resolution framework are particularly in need of reform – the bail-in regime and the resolution mechanism for cross-border banks – and propose a reform of both.

By: Mathias Dewatripont, Lucrezia Reichlin and André Sapir Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 16, 2021
Read article More on this topic More by this author
 

Opinion

More Europe or less Europe?

Europe is often a ship with multiple captains. The boat moves forward in calm seas, but when the slightest wind puts it off course, it is not easy to steer that boat. It is not so much a question of more Europe rather than less, but of achieving ‘one Europe’. A ‘more-or-less Europe’ is an invitation to go nowhere.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: April 14, 2021
Read about event More on this topic
 

Past Event

Past Event

An alpine divide? Comparing economic cultures in Germany and Italy

A discussion of Italian and German macro-economic cultures and performances.

Speakers: Thomas Mayer, Patricia Mosser, Marianne Nessén, Hiroshi Nakaso, Francesco Papadia, André Sapir and Jean-Claude Trichet Topic: European Macroeconomics & Governance Date: April 13, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Keeping momentum on good governance

Transparency, human rights and good governance: a conversation with Katalin Cseh MEP

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 17, 2021
Read about event More on this topic
 

Past Event

Past Event

Presentation of the Euro Yearbook 2021

Join us for the launch of the eighth edition of the 'Euro Yearbook'

Speakers: Maria Demertzis, Fernando Fernández, Fiona Maharg-Bravo, Antonio Roldán and Jorge Yzaguirre Topic: European Macroeconomics & Governance Date: March 12, 2021
Read article More on this topic More by this author
 

Opinion

Central banks don’t have to pick winners and losers to fight climate change

Disclosures and financial regulation don’t get enough respect as tools to reduce emissions.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: March 11, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

When and how to unwind COVID support measures to the banking system?

Study of regulatory measures and supervisory practices that have supported public guarantee schemes and moratoria in euro-area countries prepared for the ECON committee of the European Parliament.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: March 9, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Can central banks save the planet?

“We are not going to lead our society to a low-carbon economy by continuing to finance the status quo. “

By: The Sound of Economics Topic: Energy & Climate Date: February 24, 2021
Read article More on this topic More by this author
 

Blog Post

A brown or a green European Central Bank?

The European Central Bank portfolio is skewed towards the brown economy, reflecting a bias in the market. Can and should the bank deviate from the market allocation?

By: Dirk Schoenmaker Topic: Energy & Climate Date: February 24, 2021
Load more posts