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Reviewing the ECB’s decision-making system

Reviewing the ECB’s decision-making system

Why public discussion on ‘rotating vote’ would have been helpful

by Ernst Welteke

Fri 4 Mar 2016

Jens Weidmann, president of the Bundesbank, will not have a vote at the next monetary policy-making meeting of the European Central Bank’s governing council on 10 March. This is because of an elaborate change to ECB voting procedures decided in February 2003 – when I was a member of the ECB council – that took effect last year.

These circumstances are unfortunate, at a meeting that is widely expected to take decisions on further monetary easing that, in Germany at least, may be somewhat controversial.

Weidmann’s temporary disenfranchisement (which lasts for just one month) will probably not make much difference to the outcome, since other governing council members who hold contrasting monetary policy positions will also not have a vote. Moreover, Weidmann and his rather conservative monetary stance represent a minority view on the council, which anyway takes decisions mainly on consensus.

However, Weidmann’s absence from voting could have psychological consequences, particularly in view of the widespread belief among the German population that monetary policy decisions – for example, on negative interest rates – discriminate against Germany as a creditor nation with large savings.

Weidmann’s move from the voting lists reflects a ‘rotation system’ decided unanimously in February 2003 by the ECB’s governing council – after long discussions, mostly in informal meetings. The decision, subsequently endorsed by the European Council, was designed to allow the ECB ‘to take decisions in a timely and effective manner… in an enlarged euro area’ by assuring that the total number of governors authorised to vote would not exceed 15.

As part of the governing council that took the original decision, I must say that my scepticism of 13 years ago was justified. Wim Duisenberg, the ECB president at the time, pressed me – in the interest of showing that the ECB as a whole was able to take difficult decisions to improve the smooth running of its deliberations – into setting aside my objections and voting for the motion. To show solidarity, I did so. However, with the benefit of hindsight, I can say that wider public discussion would have been helpful.

It is difficult to find a convincing argument in favour of the rotation system. All national central bank governors continue to participate in the governing council’s discussions. So the limitation of voting rights neither increases or safeguards the efficiency of its deliberations, nor mitigates their length, which remains exactly as before.

The new voting system was introduced in January 2015 with the accession of Lithuania as the 19th euro member state. The missing voting right has not up to now been relevant for Weidmann. In one of the months since then (May 2015) when he did not have a vote, there was no monetary policy meeting. In the other month (October 2015), decisions were postponed.

The central bank governors on the ECB council are assigned to two groups, exercising their voting rights with different frequencies corresponding to their countries’ economic strength, size of financial sector and ECB capital share. (Click here to view OMFIF's chart on the rotation system.) In effect, Weidmann is one of five governors (along with those of France, Italy, Spain and the Netherlands) who do not have a vote in two months of the year.

The six members of the executive board are not affected by the system. And it does not apply to decisions in financial matters such as paying up and increasing the ECB’s capital, revising the ECB capital key, transferring foreign reserve assets to the ECB, and allocating monetary income and net profits and losses.

The change in the voting procedures affects two ECB guiding principles. First, ‘one member – one vote’. Second, that the governors are appointed in their personal capacity as experts and not as representatives of their member states. The latter is the basis for the former. In the new system, the frequency of voting rights depends on national indicators, underlining that the governors are indeed representatives of their national states.

The power of the executive board, with constant voting rights, is strengthened against that of the central bank governors. The system increases the voting power of the governors from the largest economies over that of the smaller ones.

Adding to the confusion, the new system changes votes on a monthly basis, whereas the monetary policy meetings now take place every six weeks. All this raises the complexity of communicating the ECB’s monetary policy decisions at a time when these matters are subject to conflicting opinions.

Ernst Welteke was President of Deutsche Bundesbank between 1999 and 2004.

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