Jens Weidmann, the president of Germany's central bank, the Bundesbank, might as well go on vacation in May and October, the months this year during which the Bundesbank will have no voice on the governing council of the European Central Bank.
When this new policy became public, many German columnists and economics professors were up in arms over what they characterized as a "regulatory lapse." They decried it as a "violation of the established business insight that liability and responsibility should go hand in hand," noting that the "underrepresentation of German interests in this body" would only be exacerbated.
The rotation system for the allocation of voting rights in the ECB governing council, in place since the beginning of the year, is undoubtedly a bizarre and pointless creation. But it doesn’t mean that legitimate German interests are being undermined.
These populist arguments distort our view of what is really needed, namely a drastic reduction in the size of the ECB council.
The ECB is not the legal successor of the Bundesbank. And the ECB council is not a clearing house for national interests.
As a result of Lithuania's accession to the euro zone at the beginning of this year, a rule enacted by the European Council in 2003 has now come into effect. All representatives of the national central banks will have a voice in all meetings of the ECB council, but the number of members with voting rights in this body has been limited to 21, with six members of the ECB executive board having permanent voting rights and the remaining 15 votes rotating among the representatives of individual member states.
Under the new rotation system, four of the 15 votes are allocated to the five biggest economies – Germany, France, Italy, Spain and the Netherlands – and 11 votes to the remaining 14 countries.
That means the representatives of the large economies can vote in 80 percent of the meetings, while those of the smaller economies have the right to vote in 79 percent of meetings, as long as their number does not exceed 14. If the number of member states increases again, the smaller countries will be placed at a disadvantage.
In other words, Germany is not being disadvantaged or deprived of its ability to shape monetary policy. This is why a monetary-policy hardliner like Otmar Issing, the former chief economist of both the Bundesbank and the ECB, has no objection to the rotation principle.
It is far more important that the Bundesbank be able to ensure monetary stability in Germany and promote employment and growth, provided this goal is not jeopardized. The ECB is not the legal successor of the Bundesbank. Its role is to pursue a monetary policy that is appropriate for the entire euro zone. And the ECB council is not a clearing house for national interests in accordance with the economic importance of the individual countries.
Still, many economists, politicians and journalists want to see voting rights weighted according to the member states' individual stakes in the subscribed capital of the ECB. But they ignore the fact that this demand blatantly violates the goal of denationalizing monetary policy, agreed to in the late 1990s.
If we are serious about improving discussions and decision-making in the ECB council, it makes sense to reduce its size, for which the 2002 organizational reform of the Bundesbank could serve as a role model. At the time, the German government, in the face of strong opposition by the German states, established a new system in which the Bundesbank was no longer run by a directorate and the council of state central banks, but by an eight-member executive board.
The presidents of the state central banks were left out of the picture. Since then, the president and vice-president of the executive board have been appointed by the federal government, and four other board members have been nominated by the states. This reduction in size by depriving the states of some of their power to shape the board has definitely not led to a decline in the quality of the Bundesbank leadership. This example is a strong argument for significantly reducing the size of the ECB council.
A possible solution would be a body made up of the six-member executive board and six other members selected from among the group of presidents of the national central banks on the basis of an international nominating process. Representatives of the national central banks in the euro zone could certainly throw their hats in the ring, but it would no longer be a given that the ECB council included a representative of each member state.
This would strengthen rather than diminish the council's independence and the stringency of its decisions. In short, this recruiting mechanism would more effectively implement the principle of a monetary policy informed more by the needs of the entire monetary union and less by the interests of individual countries. Besides, a smaller ECB council would undoubtedly be able to operate more efficiently.
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