Parliament bares teeth on ECB
By Benjamin Fox
Prior to the 2009 elections the European Central Bank (ECB) did not take the European Parliament very seriously. In its defence, it did not need to.
The bank's function was just to control price stability through interest rates and - with the first decade of its existence coinciding with a period of prolonged and consistent economic growth - there were relatively few challenges to its work.
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Scrutiny of the ECB was also fairly tame. Compared to the powers that the US Congress has over the Federal Reserve or the UK House of Commons over the Bank of England, scrutiny at European level was palpably weak.
The accountability of the bank to the parliament consisted of one non-binding report per year responding to the ECB's own annual report, with MEPs giving their verdict on the bank's performance and making a handful of modest demands.
Meanwhile, the President of the ECB would appear before the economic committee every three months for a "monetary dialogue" which consisted of a presentation followed by questions from MEPs.
A tough examination with probing and hostile questioning it was not. One contact at the bank once remarked that she was surprised at how reverentially MEPs treated former Presidents Duisberg and Trichet.
The financial and sovereign debt crises have changed things, however.
In 2008 and 2009 the bank started to pour almost limitless amounts of cheap money into the eurozone's ailing banking system, with its Fixed Rate Full Allotment scheme and long-term refinancing operations guaranteeing a liquidity fix for all banks which need it.
Over four years after the collapse of Lehman Brothers, the ECB is still providing economic life-support to private banks.
It then switched its attention to sovereign debt, starting with Greek paper, and bought huge quantities of government bonds.
At the same time, the so-called Jacques de Larosiere report - a blueprint on EU financial supervision drafted by a former top official in the International Monetray Fund - set in motion plans for creating new EU agencies on banking, securities, markets, insurance and pensions and a new systemic risk board (ESRB) run by the ECB to act as an overall "watchdog."
With such an activist role, it is both right and politically essential that the ECB can be held to account.
The ECB, anxious to get started with the ESRB as soon as possible, started lobbying MEPs with the aim of getting the legislative process to speed up.
But parliament has started to become more assertive. ECB officials were furious in January 2010 when MEPs on the economic committee announced that it would summon all new appointees to the bank's executive to pre-appointment hearings, a practice previously reserved solely for the ECB's president-elect.
But if the central bank's top-brass were irritated by this, they could be in for some further annoyance.
This week the parliament may oppose the appointment of Luxembourg's central bank governor, Yves Mersch, to the ECB board regardless of how well he performs before the economic committee on Monday (22 October), on the grounds that there are no women at the ECB's top table.
It would be the first time MEPs have rejected a nominee to the bank.
The Mersch saga has been rumbling on for a few months. The parliament's first shot across the bows came in May when Sharon Bowles, the committee's UK Liberal chairperson, wrote to Eurogroup chair Jean-Claude Juncker urging him to present ministers with male and female candidates to replace Spain's Jose Manuel Gonzalez Paramo.
The letter, which was agreed unanimously by political groups, also called on ministers to promote women to the top posts in the ECB as well as national central banks and ministries.
However, MEPs were rebuffed. In July, Mersch was approved by eurozone finance ministers for the post which, if he serves the standard eight year term, means that the ECB's six-person executive board will remain a men-only club until 2018.
Under the treaties the parliament has to be "consulted" before ECB executive board members can be appointed, but it has no formal veto powers.
Officials connected to the Eurogroup have indicated that Mersch will be appointed despite parliament's opposition. That said, ministers will be reluctant to defy Parliament since refusing to endorse a candidate sends out a hostile political statement.
It is a tactic that the parliament has used repeatedly over the past 50 years, whether over legislation or appointments, to gradually assert its legitimacy and to increase its powers in EU decision making.
For instance, MEPs have been demanding that the ECB publish the minutes of meetings of its governing board for years.
The bank has always flatly rejected this, insisting that publishing what its members say and how they vote would undermine market confidence in its decision-making process. But in September, ECB President Mario Draghi indicated that he had an "open mind" on the issue, as close to a u-turn as a central banker can go.
A portent of things to come
Taken in the context of ongoing bank union proposals which will establish the ECB as the supervisor of the eurozone's banking sector, parliament's show of strength is a portent of things to come.
Many MEPs were bemused by the banking union package, angry that the commission proposal to expand the ECB's remit will be decided solely by ministers.
The two MEPs chosen to lead parliament's negotiations on the deal - Dutch centre-right deputy Marianne Thyssen and German green Sven Giegold - have made it clear that they will treat the two files as though MEPs have an equal say on both. MEPs are likely to demand regular hearings with the ECB's supervisory arm as well as democratic control over its senior members.
Parliament asserting its right to keep the ECB - and finance ministers - honest is a healthy development.
The ECB has assumed a major role in the EU's crisis management response to first the banking crisis and then the sovereign debt crisis, and will become a financial authority second only to the US Federal Reserve in terms of power if, as expected, it becomes the single supervisor of the eurozone's banks.
Establishing the ECB at the centre of a banking union makes closer parliamentary scrutiny essential if the banking union is to command the legitimacy it needs.
In practice, this will probably mean that the ECB will relax its attitude on some previously sacrosanct matters.
Though often derided as a "talking shop," parliament has a strong track record as a chamber demanding more control over EU decision-making and the decision-makers themselves. The ECB would be well-advised to make parliament a friend rather than a foe.