The ECB should vote on interest rates, and then publish its minutes

Even French president Nicolas Sarkozy can be right about some things – malgré soi. He wants the ECB to publish the minutes of the rate-setting meetings of its Governing Council, including an account of each member’s view on the appropriate level of the ECB’s official policy rate – the inelegantly named Main refinancing operations Minimum bid rate. And about time too. But before it makes sense for the ECB to publish the minutes of its rate-setting meetings, the ECB has to start voting on its interest rate decisions.

Remarkably, the fact that the ECB’s Governing Council has never voted on the interest rate it sets does not appear to be widely known. Last night, the ECB correspondent of CNBC contradicted me when I asserted that the Governing Council had never voted on interest rates. She asserted that the ECB president, Jean-Claude Trichet, had often referred to the vote being unanimous. He hasn’t, of course. What he did say on a number of occasions was that the decision had been unanimous.

The ECB has never had a formal vote on interest rates. I know this straight from the mouths of horses who between them have attended every single one of the ECB Governing Council’s rate-setting meetings since the first one in January 1999. Instead of voting on the interest rate, the ECB’s Governing Council ‘reach a consensus’ without ever taking a vote. The mystical process through which this consensus is achieved can only be guessed at.

Not voting on interest rates is an essential part of the ECB’s framework for non-accountability. Since they don’t vote, they cannot of course publish either the aggregate vote or the individual votes. Since there is a consensus, there is no need for individual Governing Council members to justify the decision. A collective statement suffices, like the pre-cooked (that is, written before the rate-setting meeting) Introductory statement preceding the Q&A, given by the ECB president immediately following the rate setting meeting.

Vote early, vote often…

The fact that the Governing Council has never voted on interest rates is amazing in view of the significance attached in the Treaty and Protocols to even the fine (not to say esoteric) details of the voting rules. The Protocol citations that follow are taken from the unofficial consolidate version of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank.

Article 9.3. In accordance with Article 107(3) of this Treaty, the decision making bodies of the ECB shall be the Governing Council and the Executive Board.

Article 10

The Governing Council

10.1. In accordance with Article 112(1) of this Treaty, the Governing Council shall comprise the members of the Executive Board of the ECB and the governors of the national central banks.

10.2. 1 Each member of the Governing Council shall have one vote. As from the date on which the number of members of the Governing Council exceeds 21, each member of the Executive Board shall have one vote and the number of governors with a voting right shall be 15. The latter voting rights shall be assigned and shall rotate as follows:

- as from the date on which the number of governors exceeds 15, until it reaches 22, the governors shall be allocated to two groups, according to a ranking of the size of the share of their national central bank’s Member State in the aggregate gross domestic product at market prices and in the total aggregated balance sheet of the monetary financial institutions of the Member States which have adopted the euro. The shares in the aggregate gross domestic product at market prices and in the total aggregated balance sheet of the monetary financial institutions shall be assigned weights of 5/6 and 1/6, respectively. The first group shall be composed of five governors and the second group of the remaining governors. The frequency of voting rights of the governors allocated to the first group shall not be lower than the frequency of voting rights of those of the second group. Subject to the previous sentence, the first group shall be assigned four voting rights and the second group eleven voting rights;

- as from the date on which the number of governors reaches 22, the governors shall be allocated to three groups according to a ranking based on the above criteria. The first group shall be composed of five governors and shall be assigned four voting rights. The second group shall be composed of half of the total number of governors, with any fraction rounded up to the nearest integer, and shall be assigned eight voting rights. The third group shall be composed of the remaining governors and shall be assigned three voting rights;

- within each group, the governors shall have their voting rights for equal amounts of time;

I would say to the Governing Council: better start voting while you still understand the voting rules! You are still just 21 in number (15 national central bank governors and six executive board members), but Slovakia will join on January 1, 2009. Then there will be 22 of you and no-one will any longer understand the voting rules.

Publishing individual votes and minutes

The argument that is forever trotted out against publishing individual votes and minutes revealing the views of individual Governing Council members is that this would provide national governments (and possibly other special interest groups) to put pressure on national central bank governors to act not in the interest of the euro area as a whole, as the ECB’s mandate demands, but in the interest of a particular nation or sectional interest.

Humbug, and an example of how repeating nonsense often enough can make it look and sound like a self-evident truth. Note incidentally, that even if this argument of undue national influence were correct, it would not be an argument against (1) voting and (2) publishing the aggregate vote.

But the argument is blatantly false. Undue national or special interest pressure on national central bank governors (or indeed on executive board members – no need to leave them out as they all are citizens of a euro area member state) is most easily brought to bear when there is no public information about who votes how and why. With individual votes in the public domain and with individual explanations of votes in the minutes, the duly constituted body to which the ECB is formally accountable, the Economic and Monetary Affairs Committee of the European Parliament, can hold to account any ECB Governing Council members whose voting behaviour displays a national bias.

The Protocol is very clear on the fact that no-one outside the Governing Council can try to influence the decisions of the Governing Council:

Article 7


In accordance with Article 108 of this Treaty, when exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and this Statute, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.

The executive board members are appointed for one term only. National central banks and their governors are well-protected by the Protocol:

Article 14.1. In accordance with Article 109 of this Treaty, each Member State shall ensure, at the latest at the date of the establishment of the ESCB, that its national legislation, including the statutes of its national central bank, is compatible with this Treaty and this Statute.

Article 14.2. The statutes of the national central banks shall, in particular, provide that the term of office of a Governor of a national central bank shall be no less than five years.

Finally, with individual voting behaviour as public information, pressure on national central bank governors or executive board members that leads them to vote in ways that make no sense from the point of view of the euro area-wide price stability mandate could be punished. According to the Protocol (in the continuation of Article 14.2)

A Governor may be relieved from office only if he no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct. A decision to this effect may be referred to the Court of Justice by the Governor concerned or the Governing Council on grounds of infringement of this Treaty or of any rule of law relating to its application.

Giving in to national pressures surely constitutes ‘serious misconduct’ and an ‘infringement of this Treaty’. Similar provisions permit the removal of an executive board member. Punishment (getting fired for serious misconduct) is only possible, and the threat of punishment is only a credible deterrent, if there is evidence of a crime. Without voting and publication of individual votes, there can be no such evidence, and the Governing Council is vulnerable to unwarranted external pressure.

What are these pressures national governments or other special interests can bring to bear on national central bank governors or executive board members? Will they be taken into a basement and beaten with a rubber hose? Will their children be kidnapped? Let’s be real. There are no sticks national governments or special interests can beat their national central bank governors with, unless these governors are terminal wimps who become ill at the thought of high-level displeasure in the national capitals.

What about carrots? The only things national governments can use to put pressure on ECB Governing Council members are (a) re-appointment (in the case of national central bank governors) and (b) post-Governing Council term honours or public sector appointments. The solution to (a) is obvious. Let governors of national central banks be appointed for one term only (say for 7 or 8 years). It is more difficult to handle (b), but there may not be too many politicians in a position to do something for the governor of their national central banks after the governor’s retirement from his/her central bank position. The governor’s central bank career is likely to be longer than the politician’s term in office.

To conclude: corruption of the mandate and purpose of the ECB are much more likely when there is no voting on rate decisions, when the individual votes are not in the public domain and when no informative minutes explaining individual votes are published.

It is clear that the Treaty and Protocols (a) require voting on interest rates (why bother with the voting procedures otherwise) and (b) permit the publication of individual voting records and minutes. Article 10.4 of the Protocol states: 10.4. The proceedings of the meetings shall be confidential. The Governing Council may decide to make the outcome of its deliberations public.

More robust debate

Mr Sarkozy also proposes that euro area political leaders engage the ECB in more robust debate about monetary policy. There are in principle two reasonable models of interaction between the central bank and the political leadership of a country or of the EU. The first is where the central bank sticks to its knitting and does not comment on or make recommendations on matters that are not part of its mandate and competency. This includes fiscal policy and structural reform. The central bank can explain its reaction function, that is, how its rate setting policy is likely to be influenced by elements beyond its control, including fiscal policy and structural reform, but it does not lecture, admonish, warn or threaten. The central bank talks in public about monetary policy and financial stability and shuts up about everything else. Symmetrically, prime ministers, ministers of finance and of the economy don’t publicly advise the central bank on how to manage interest rates or financial stability.

This model used to be the one informally adopted by the UK when the Bank of England became operationally independent in 1997. It has since been undermined, mainly through public statements by the Chancellor of the Exchequer, Alistair Darling and the prime minister, Gordon Brown, that attempt to push the Bank of England in the direction of lower interest rates. There has also been the occasional minor lapse by the Governor on fiscal matters.

In continental Europe, including the euro area, the ‘sticking to one’s knitting’ model has never worked either for the central bank or for the political authorities. President Trichet is never happier than when encouraging/cajoling governments to reduce budget deficits and engage in efficiency-enhancing structural reforms. Politicians, especially French and Italian, but also Spanish and German, have also not been able to refrain from telling the central bank how to conduct monetary policy – generally in the direction of lower interest rates. I can think of only one example where a minister of finance publicly criticised the central bank for keeping rates too low and letting inflation rise too far. That was the Polish Minister of Finance and the Economy, Jacek Rostowski, earlier this year.

Given that mutual restraint doesn’t work, a healthy two-sided debate is the next best alternative. The ECB is already minding the business of the finance minsters and minsters of the economy in the 15 countries of the euro area. The finance ministers, ministers of the economy, prime ministers and heads of state of the fifteen euro area members should therefore feel free to comment publicly on the ECB’s rate policy, to criticise it and to make recommendations. The ECB has, I am sure, a sufficient number of large capacity waste paper baskets to handle the vast bulk of such utterances and recommendations. And who knows, some of them may contain some insight and have some merit.

Beefing up the euro group

Mr Sarkozy also wants to strengthen the euro group of finance ministers of the euro area member states. Good luck to him. If he wants a permanent secretariat for the euro group, I am sure there must be a small slush fund around somewhere in the French Presidential budget to allow him to kick-start the process. The problem is that until and unless the Lisbon Treaty gets ratified, the euro group has no ‘constitutional’ or Treaty-based existence. It’s a common-law institution not mentioned in any of the Treaties or protocols, except for the defunct Treaty establishing a Constitution for Europe and the near-defunct Lisbon Treaty.

Unfortunately for Mr. Sarkozy, his cack-handed verbal interventions in the Irish debate on the Lisbon Treaty have made it all but a foregone conclusion, that the Irish electorate will turn down the Treaty again, should they be asked to vote on it once more. So the euro group as a united forum for making threatening noises and gestures in the direction of the ECB is likely to be some time coming, for better or worse.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website