Two major steps
Two developments are likely enormously to increase the role of the European Central Bank (ECB) in the euro zone. First it has announced its intention by a large majority on its board of governors, though against one of the two German members of the board, Jens Weidman, to be prepared to purchase unlimited amounts of the bonds of governments of up to three years duration, whose interest rate spreads against those of other euro zone countries are unacceptably high, but on the condition that the governments of such countries accept what they see as the humiliating need to subject themselves to agreed programmes monitored by a troika of the ECB itself, the IMF and the European Commission as has been the case for Greece, Ireland and Portugal.
Secondly, plans being developed for a “banking union” of euro zone countries envisage a single prudential regulatory authority, namely the ECB, banks in all the participating countries.
Does this mean democratic deficit will increasee?
In both cases, the stability and prosperity of the euro zone is at stake and it makes good sense from a practical point of view to give these powerful roles to a body which has established its independence, brings together representatives of all euro zone countries and can draw on a deep well of economic and financial expertise. On the other hand, the ECB board is not elected which means that the existing democratic deficit of the euro zone will be increased. The moves can be justified by the fact that popular opinion in most countries favours keeping the euro zone together rather than a return to national currencies and given the risks that the latter could happen unintentionally, the best policies available should be used to hold the currency together. Nevertheless, the consequences for democratic accountability need to be debated, taking heed of concerns expressed by bodies like the German constitutional court, which on September 12 gave the go-ahead to a new permanent European Stability Mechanism to take over from the temporary European Financial Stability Facility (EFSF) but emphasised the need for the German parliament to remain involved and agree only after proper debate to any further commitments. The constitutional court had previously expressed its opinion that the European Parliament does not have a high enough profile to replace the need for the involvement of national parliaments in the development of the euro zone. One conclusion should be that efforts should be made to enhance the oversight role of the European Parliament but another is that there is no foreseeable prospect that this will replace the need for oversight of key euro zone policy developments by national parliaments, despite the difficulty of making a coherent policy out of 17 different parliaments.
The role of the troika
The ECB has been right to insist that it will only intervene from now on in government bond markets if the country concerned has agreed to a programme monitored by the troika since that ensures that the decision is shared. Although the IMF has no effective democratic accountability, the Commission can be thrown out by the European Parliament and does have to take account of the views of the elected governments of participants. Moreover the programmes are monitored and debated by national parliaments and the press in creditor countries. There is inevitably going to be conflict between the democratically expressed wishes of debtor and creditor countries, as is continuing in an acute form in the case of Greece. It can be argued that Spain and Italy are already trying to implement very severe austerity programmes and that any more austerity might well be counter-productive by depressing the economies and their tax-raising capacities. However, it cannot be predicted what will happen if and when current governments lose power. The Spanish government is relatively new but is still vulnerable as a result of disenchantment and tensions with regional nationalities, Catalonia and the Basque Country, while the government of Mario Monti in Italy cannot last beyond the next election due in April 2013. On this issue therefore the ECB chaired by Mario Draghi (but the ECB decisions are collective) has given a coherent and balanced lead which is as far as possible compatible with democratic criteria but it will have many future challenges.
ECB could have done much more to oversee national banking systems
On the question of bank supervision more reservations are in order. It is important that the ECB be held accountable and it has not been very effectively held to account to date. It is true that it did not have the same degree of authority over financial stability as it is to be given but it clearly should have been a concern to the ECB while many of the national banks, part of the European System of Central Banks (ESCB) with the ECB, did have responsibility for bank supervision. The ECB did point to the dangers posed by government deficits and but failed to point to the equal dangers posed by banking imbalances, particularly in Spain and Ireland. In fact it did not consider it important to examine what was happening in individual countries, believing instead that the euro zone could be treated as a single economy. That was a position that it had to take with regard to setting interest rates but is not appropriate for seeing signs of financial instability. A good first move would be to publish comparative statistics for the different countries rather that just euro zone wide statistics as it has done so far, in contrast for example to the IMF and OECD. The ECB if it is to live up to its new role needs to learn lesson from its past failings and should be made to explain why it failed by the European Parliament. The result would not be likely to be that the task of supervising banks is passed to other institution since none that would have been likely to have been more prescient exists but it would help the cause of democratic accountability in the euro zone. The European Parliament is a parliament for the whole EU but what happens in the euro zone and what the ECB does is a matter of importance also for non-euro zone EU countries.