Central banks and democracy in the EU

18 September, 2013 | Posted By: Jim Leontiades

Central banks and democracy in the EU

By Jim Leontiades
Cyprus International Institute of Management (CIIM)

It is no secret that the power of central banks has grown radically over the past few decades. Part of this growing power stems from growth in the banks and the banking systems that central banks supervise. The development of new, innovative new financial tools has also contributed to this. Central bankers themselves have assumed some of the media notoriety previously reserved for national politicians and film stars.
Within the Euro zone, this greater power has been accompanied by a change in the relationship of central banks to national governments. The traditional balance of power which characterises democratic governments, shielding economic decisions from the more populist pressures of elected officials, has shifted. The independence of central banks which has comprised an important part of this balance is no longer what it was.
The Maastricht Treaty makes clear (article 107) that national central banks remain independent of national government control. But this does not mean that such banks are independent, far from it. They are now entirely dependent on the European Central Bank (ECB). As the Maastricht treaty (article 14.3) explains, national central banks “shall act in accordance with the guidelines and instructions of the ECB”.

National central banks are no longer national institutions in any meaningful sense. They have become integral parts of a European organisation, mere branches of a European central bank with little allegiance or accountability to their national governments. Cypriot parliamentarians have learned that their legislative powers do not extend to the Central Bank of Cyprus. Any proposed legislation which affects their national central bank will quickly elicit a message from the ECB indicating what they can and cannot do.
Before joining the Euro zone, national central banks had enormous power at their command; the power to issue bank notes, influence the exchange rate of the national currency and to act as lenders of last resort for local banks. These powers are no longer theirs. Once a country joins the Euro zone, they are appropriated by the ECB. The result is less power for national governments and a concentration of power at the European level.
This rearrangement of economic powers makes the ECB arguably the most powerful institution in the European Union. No other institution of the EU has the unchecked power to quite literally destroy entire industries and dictate conditions to elected governments. Cyprus politicians had occasion to experience this power at first hand during the recent (March 2013) negotiations for the “bail in”.
In bargaining with the Eurogroup over the MOU, President Anastasiades was told that he had only a few days (3) to sign the agreement. The President said that he felt as if he had a gun to his head. The gun was held by the governor of ECB, Mario Draghi in the form of ELA (Emergency Liquidity Assistance) which he threatened to cut off almost immediately if the President did not sign, thus bringing down the country’s entire financial system.

It is ironic that the most powerful economic institution in the EU is also the least accountable. The Euro summit meetings which negotiate the important decisions for the Euro zone consist for the most part of elected heads of state. The ECB and its council are all appointed. For some time the European Union has been sensitive to the charge of a democratic deficit, i.e., power wielded by non- democratically elected bodies. Responding to this, the EU has greatly expanded the powers of its elected parliament. This accountability to a democratically elected body has not so far extended to the ECB. Its governor, Mario Draghi, is appointed for eight years and can only be removed due to incapacity or serious miss-conduct as judged by the European Court.
This lack of democratic constraint has not gone unnoticed. Speaking with reference to Ireland’s own austerity programme, Paul Murphy, an Irish member of European Parliament is quoted in the Guardian newspaper as saying: “There needs to be a check on the enormous power of the ECB, which is unelected and has basically held a government to ransom”. On the same subject, another European parliamentarian comments: “This is not democracy at the EU level”. (The Guardian, 22 August 2011)

The treaties establishing the European Union are liberally sprinkled with phrases declaring the protection of “property rights”, “human rights”, “democracy” and “freedom to conduct a business”. None of this seems to have applied to the ECB and its decisions regarding Cyprus. Nor is the “transparency” which features prominently in the treaty obligations of the ECB very obvious. The minutes of its major decision making body, the Council, are not published. Nor have Cypriots found satisfactory explanations for the formula used by Pimco to calculate the financial obligations of their banks, or the rational behind the division of assets and voting rights as between “old shareholders” and new shareholders of the Bank of Cyprus.
In the past few days there has been an agreement within the EU establishing a new single supervisor of all European banks. This agreement includes some form of accountability by the ECB to the European Parliament (which initially opposed this provision). The precise details and effectiveness of this proposed accountability are not yet clear. What is clear is that Europe’s financial system is to be further centralised at a European level, giving the ECB additional power over national financial systems.