Transparency International whacks at a central bank.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The European Central Bank has found itself in the rare position of having to defend itself in the public arena following the release of a scathing report on its perceived lack of political independence. The report, published by anti-corruption watchdog Transparency International, argues that the institution has accrued new power and influence in the wake of the financial crisis but its code of conduct has not kept up with that newfound clout.
It even suggests that the ECB should withdraw from the Eurozone’s Troika of creditors, precisely at a time that calls are rising for the creation of a European Monetary Fund.
“The extraordinary measures taken by the ECB since 2008 have tested the ECB’s mandate (to ensure price stability) to breaking point,” Transparency International EU said. “The ECB’s accountability framework is not appropriate for the far-reaching political decisions taken by the Governing Council.”
The Berlin-based NGO has proposed a range of measures to improve the central bank’s transparency and accountability. They include better management of conflicts of interest, clearer rules on the cooling-off period before former officials accept private-sector jobs; and much higher levels of transparency on the ECB’s meetings with lobbyists. The report also recommends that the central bank should consult the European Parliament and Eurozone finance ministers regarding any crisis measures that go beyond its original low-inflation mandate.
The ECB does not entirely agree. Too much transparency could impinge on its much-cherished political “independence,” it warns. “When it comes to politicians, independence is very much in the eye of the beholder,” Benoît Cœuré, a member of the ECB’s highly influential Governing Council, said in response to the report’s findings. “When they like what we do, we are independent. When they don’t, we are overreaching.”
Alas, the biggest problem with the ECB is not its proximity to European politicians but rather its incestuous relationship with the very institutions it is meant to supervise, as well as monetarily support through its myriad financial welfare programs: the big banks. In 2015, Cœuré himself was caught sharing confidential, privileged information about the ECB’s imminent bond purchases at a meeting of academics, bankers, and hedge funders which was promptly used to front-run the program.
Little has changed since then. Cœuré remains in his post and the ECB is now under investigation by the EU Ombudsman for the close involvement of a number of its high-level officials with the Group of 30, a secretive forum of influential academics, policy makers and senior financial executives representing banks like UBS, Credit Suisse, JP Morgan Chase, Santander and Goldman Sachs.
It’s also come under scrutiny for its purchase of bonds directly from companies behind closed doors as they issued these bonds via “private placements” — a common enough practice for investors but one which raises serious ethical concerns when it’s being done by Europe’s newfound “debt buyer of first resort,” with billions of euros of public funds. There’s also plenty of opportunity for the ECB to inform select hedge funds and certain other market participants of its latest investment decision, so that they can front run the investment.
The problem is not just the ECB’s coziness with the institutions it is supposed to supervise; there’s also the inconvenient fact, much ignored until now, that it is considerably more politically engaged than it often pretends to be.
Case in point: the discreet role the central bank played in the 2011 ouster of former Italian Prime Minister Silvio Berlusconi after he had threatened in private meetings to pull Italy out of the Eurozone. When Italy’s risk premium reached breaking point in the autumn of that year, egged along by the ECB’s uncharacteristic reluctance to intervene in the markets, Berlusconi was forced to resign and was promptly replaced by Mario Monti, a former EU Commissioner and Goldman Sachs advisor who could be counted on to stick with the program.
As its responsibilities have grown, the ECB’s political influence has grown with it. Following the Banking Union of 2014, it became the Eurozone’s sole banking supervisor. In the absence of a genuine European central or federal government with direct fiscal powers, the ECB has become Europe’s most powerful institution.
The Eurozone’s financial system and economy continue to be run, de facto, by the ECB. In the absence of a central government, there’s still no safety net for regions suffering structural decline, like Italy or Greece. As we saw in its standoff with Greece in the summer of 2015, when things get serious, the ECB is not afraid to flex its power, even if that means sparking the early stages of a run on its banks. As Transparency International notes, such actions cannot be divorced from the realm of politics:
In critical situations, technocratic policy issues invariably become political and draw the ECB into political negotiations that are inconsistent with the textbook notion of central-bank or supervisory independence. There are only two remedies: greater democratic control, and thus less independence, or, since that may not be desirable, more transparent decision-making and communication.
That would certainly be better than nothing — and a great deal better than what we have right now. But it won’t be allowed to happen. Central banks the world over are rarely welcoming places for the bright light of public scrutiny, for an obvious reason: if enough people actually knew — and properly understood — what was going on behind their central bank’s thick walls and closed doors, they would probably not tolerate it for much longer. By Don Quijones.
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