Volume 14, Issue 4 - Toward a European Credit Council?

This article provides a framework for understanding the economic role of central banks and their democratic legitimacy. I argue that thinking about the democratic challenges of central banking requires considering central banks’ insurance role and how their actions are part of credit policy . The contract between the central bank and the sovereign is incomplete because it cannot integrate all unforeseen contingencies, distributive consequences and interactions with other policies. This opens the door to viewing the legitimacy of central bank decisions through a process of deliberation, coordination and reflexivity, rather than only a delegation of power. I discuss a proposal for a European Credit Council, which would be a deliberative body aimed at strengthening Parliamentary power on monetary and credit policies, the democratic legitimacy of central bank policy in the Euro Area as well as its coordination with other European policies. More coordination, Parliamentary power and deliberation are consistent with central bank independence and aim to delimit more precisely the action of central banks within the macroeconomic and credit policies of the State.

In this paper, we analyse why the changing and growing roles of independent Central Banks now do require a reconsideration of their mandate.

This discussion of Eric Monnet's idea of a European Credit Council evaluates the likely consequences of such a new institution. Based on a critical examination of the notion of economic expertise, it warns that such a council might legitimate an untenable status quo, while bringing little positive benefits. Such a council could however exercise a subversive role if its counterexpertise were to expose the limits to central bank independence in the context of the climate crisis, thus undermining the current set-up. Yet to play such a role would require a degree of confrontation which is unlikely to emerge from the council's envisioned setup.

Eric Monnet makes the case that central banks should introduce welfare-oriented credit policies and suggests legitimating these new powers through the establishment of deliberative credit councils. In this article, I argue that Monnet fails to consider how his model of central bank planning might insulate rather than democratize central banking. With low trust in experts and no society-wide consensus about how best to respond to wicked problems such as climate change, the principal danger is that Monnet’s credit councils may allow political actors to pursue agendas they do not feel they can get past electorates. Indeed, political actors may see shaping central banks’ credit policies as preferable to engaging the contentious fiscal policy domain precisely because the effects of credit policies cannot be easily held to account by voters. I suggest that credit councils are unlikely to provide a democratic channel for redressing these problems because they will inevitably privilege the voices of experts from the financial sector, industry, and (non-)governmental organisations – a de facto epistocracy – over the lay publics subject to their decisions.

In Banque Providence Eric Monnet draws on the history of central banking to investigate the problem of insufficient democratic anchoring of monetary policy. It is a very timely contribution, especially as the choices that the central bankers will face in the near future are bound to get ever more political. This article discusses Monnet’s proposals to increase central bank legitimacy through common deliberation of monetary policy authorities and economic policymakers, in particular in relation to EU’s credit policy. I draw on the rich literature on interinstitutional accountability to identify conditions for such an EU Credit Council to be fit for purpose. I further identify two specific EU contexts where further deliberation would be particularly called for: the differentiated monetary and internal market (credit) policies and the Green Deal. With regard to the first, I show how an EU Credit Council could help deepen our understanding of the mutual impact of advancing EU banking integration and continued existence of multiple currency regimes. With regard to the second, I discuss clarifications and adjustments needed in the EU legal framework to ensure that further policy coordination on financing the transition within such a Credit Council would facilitate the achievement of EU’s sustainability goals.

Eric Monnet’s European Credit Council (ECC) is an innovative, historically-grounded institutional proposal for supporting the ECB in the design of its monetary policy operations. In this commentary, I seek to strengthen the case for the European Credit Council drawing on work in progress on the history of the ECB. I first discuss the tradition of moderate interventionism as it appears in Monnet’s (Monnet, E. (2018). Controlling credit: Central banking and the planned economy in Postwar France , 1948–1973 . Cambridge University Press) study Controlling Credit . I show that the model of moderate interventionism was well-known to the drafters of the ECB statutes and efforts to categorically rule such policies out were simply unsuccessful. I suggest that this fortuitous choice has left ample legal space in the EU treaties for an ECC.

By formulating a proposal for the “democratisation” of the ECB through the establishment of a European Credit Council, Eric Monnet makes a fundamental contribution to the contemporary debate on central banking. This idea appears to be in line with other critiques that often see the post-World War II institutional set-up as a model to be revived to bring central banks back to democracy after the neoliberal disengagement of the 1980s. However, I argue in this article that the intellectual optimism with which these historical experiences are often viewed can be misleading. Going beyond the French “ideal type” and focusing instead on the “twin case” of Italy, I intend to show how the attempt to democratically control the central bank has not always been linear nor necessarily democratic and successful. The establishment of a credit council did not prevent the Bank of Italy from enjoying a high degree of independence and ability to influence policy. At the same time, the widespread system of credit policy that the central bank has explicitly promoted in pursuit of the country’s development agenda has often degenerated into irrational and opaque practices, revealing the side effects of an economy in which a sustainable boundary between fiscal and monetary policy struggles to emerge. While the Italian experience might show how problematic and “fictitious” the relationship between the credit council and the central bank can be, it can also offer interesting insights for a better articulation of it.

I provide comments and replies to the seven insightful contributions that discussed “The Democratic Challenge of Central Bank Credit Policies” and the proposal for a European Credit Council. I review how interdisciplinary scholarship on the political economy of central banking have shown the limits of simple principal-agent framework applied to central bank power and legitimacy. I emphasize why a change to central bank independence is not necessary for a fundamental change in the financial system and credit policies. I also argue that deliberations can have strong effects on decision-making and that the power of the people is not restricted to the legislative power.

The proper role of central banks – in the US the Federal Reserve – is again up for scrutiny and criticism as the consequences of the monetary policies of the Great Financial Crisis (GFC) are fully revealed. Into the debate comes the proposal of an updated version of the Credit Council, an institution that worked alongside central banks in many European countries in the adjustment from a wartime to a peacetime economy post WWII. The renovated and reconstituted European Credit Council, as conceived by Eric Monnet of the Paris School of Economics, would participate as an aid to both the legislature and central banks in developing and monitoring monetary policy. Monnet sees additional institutional oversight to be essential as central banks confront the multifaceted challenges of escaping from GFC experimental policies and dealing with emerging challenges such as the Green Transition and social inequality. Monnet’s idea has its supporters and critics in the European context. This paper attempts to assess the utility and efficacy of the Credit Council in the US context, using: (i) the EU criticisms to anticipate and respond to likely objections from US critics; and (ii) the current Fed reform debate in the US to gauge potential fit and acceptance. The conclusion, in brief, is that the Monnet CC concept could fit well within the US context and is a potentially useful mechanism for enhancing democratic responsiveness and adding to policy legitimacy as the Fed deals with existing and imminent monetary arena challenges.

Eric Monnet’s piece, “Democratic consequences of the insurance functions of central banks,” starts in exactly the right place. Monnet acutely observes some of the most fundamental issues with the dominant contemporary monetary policymaking regime. Most foundationally, he observes a gap between what central banks do and how they are legitimized. The consequence, in short, is a failure of the contemporary regime to justify itself on democratic terms. To overcome this failure, Monnet proposes an institutional reform—establishing a European Credit Council (ECC). He defends this proposal by appeal to democratic theory, particularly the literature on democratic theory that prizes ‘good deliberation’. While there is nothing wrong with Monnet’s claim that establishing an ECC would likely improve the quality of deliberation about the role of central banks, and in so doing, produce better policy, I argue here that this view misses something essential. Democracy requires more than accountability, transparency, and good deliberation. It requires democratic power: the power of the people and their elected officials to steer policy. Adopting this view of democracy, in contrast to the deliberative democratic view Monnet embraces, suggests a different set of required reforms. Instead of establishing an independent credit council, I suggest that we should be vesting stronger monetary policy guidance powers in existing democratic legislative bodies.