Search -
Transparency and Governance 2008 (Monitoring the European Central Bank)
Transparency and Governance 2008 - Monitoring the European Central Bank Author:Petra Geraats, Francesco Giavazzi, Charles Wyplosz Even though the general orientation of policy has been faultless, the ECB is still trailing behind state-of-the-art transparency. Previous MECB Reports have already pointed this out and some progress has been achieved but more remains to be done. At a time when euro area inflation expectations are ringing alarm bells, ECB credibility is sliding... more » down. Since late 2005 the ECB has removed its highly accommodative stance, but inflation could have been lower even with the same path of interest rate decisions had not financial markets taken a long time to understand its aim. With the policy rate now close to 'neutral', financial markets face greater uncertainty about the next policy move, including its direction. This shows how important it is for the public to understand the reasoning behind the ECB's policy decisions. In a democracy, central bank independence must be constantly defended and the only defence is popular support. This is why central bankers must account for their decisions and why they cannot ignore public opinion. Support can be eroded by determined politicians, as evidenced by the declining trust in the ECB among French citizens. Such a development may tempt more politicians to earn popular support by criticizing the ECB and the repetition of largely misguided attacks may succeed in denting the reputation of the central bank. It should not be so. The solution is better communication, and not just toward the financial markets. Communication, in turn, must rest on a clear strategy and a high degree of transparency.« less