by Diego Cimino
Understanding the institutional architecture of today’s societies is a complex operation.
In the last 70 years, the creation and development of the international order as well as the multidimensional effects of globalisation have generated two phenomena: an institutional surplus and the pyramidal ‘verticalisation’ of decision-making.
The first phenomenon is undeniable. Organisations, entities, institutions, agencies have increasingly marked the stage at global, regional, national and even local level with increasingly penetrating prerogatives and powers. However, these institutions are often created on the basis of inter-governmental or technical cooperation among states, meaning that they are often not required to comply with any form of democratic control. They may be provided with ‘neutral’, ‘impartial’ or ‘independent’ status in order to pursue their aims, which frequently includes the monitoring or evaluation of political institutions and their policies. Therefore, the actions of such institutions are regularly characterised by the political neutralisation of decisions.
As for the second phenomenon, the aforementioned ’pyramid’ (see the 1. The decision-making pyramid of a Representative Democracy ) figuratively represents the dynamic of each form of governance: the relationship between citizen and decision-maker, which can be based upon a number of ‘representativity’ models. In the case of democracy and specifically its main application – representative democracy – we see the ‘delegation’ of decision-making power from alarger number of citizens to a smaller number of representatives. These representatives are charged with decision-making on behalf of the citizens. Moreover, they are held politically accountable for these decisions.
The current trend shows key decisions being made within the upper echelons of the pyramid, by independent organisations and intergovernmental and technical bodies. Falling outside of the realm of democratically elected representatives, the political accountability of decisions taken by such groups is questionable. From a formal perspective, it can be argued that there are democratic links between the levels of the pyramid. Each level of the pyramid is authorised by and connected to the level below through a process that might be called ‘representativeness by delegation’. The problem would appear to be that the higher up the pyramid decisions are made, the less accountable they are due to their ‘political neutralisation’.
In these frameworks, we increasingly hear of several kind of agents – politicians, bureaucrats and technocrats. Who are these agents? What are there roles?
The relationship between policy-makers and bureaucrats also warrants closer attention. Political institutions (such as governments, parliaments or ministries) are provided with a structure of officers ranging from lower to higher levels of responsibilities. These officers advise on, implement and support the policies, upon which the ruling politicians have ‘just’ a political responsibility. Their role is therefore very delicate, politically independent but still very influential in the making and implementing of policies.
Economists have closely analysed the relationship between politician and bureaucrat, resulting in the development of the “Economic Theory of Bureaucracy”. This theory has produced two alternative approaches to this relationship. The first, the Niskanen Perspective, views bureaucracy as the result of market failures and sees bureaucratic processes dominate the provision of goods. The second views the policy maker as dominant in the relationship, and it is therefore known as the “dominant congress approach”.
Slightly different from bureaucrats are the so called ‘technocrats’. This term is used to identify non-politicians who are called to fulfill political positions in very specific contexts or circumstances, usually for a determined amount or time or for a specific task. These are expert in fields in which the governments are called to act promptly, many times with unpopular decisions from the political perspective.
The case of ‘technocrats’ occupying political positions has recently enjoyed a renewed relevancy with the rise of ‘technocratic governments’ in a number of countries (for instance Greece and Italy in the recent past, and currently in Romania, within the EU context). Such a trend has been caused by the lack of capacity or credibility of political classes to address key issues in their own countries, issues which they were asked to tackle with urgency and effectiveness. Technocratic Governments have been seen as the ones able to operate in these delicates contexts, with arguable success from case to case.
Another case in which the expression ‘technocrat’ has been used is in relation to the complex institutional functioning of the European Union. In this case the expression is related to both officers – bureaucrats – and politicians who hold key positions in the decision-making structure of the EU, on behalf of the Union as a whole and not merely representing the interest of a single country or government.
We will now proceed with two short case studies, seeking to interrogate the relationship between political institutions, independent institutions and democratic control.
Through the analysis of central banks and European political structures, we aim to better understand when independence from democratic control can be beneficial and when controls are best observed.
Independent Institutions: the case of Central Banks. An Apology.
Central banks are responsible for the creation and management of the currency, specifically the quantity of money circulating, in each economic system. As monetary policy determines (or at the very least contributes to) the economic outlook of a country, the role played by central banks in the creation and management of currency is worthy of further scrutiny.
The universal aim of each monetary authority is to maintain price stability. However, considering the complexity and interconnection of economic systems, each change in monetary and/or fiscal policy impacts upon not only the intended target but also upon other economic variables. Therefore a monetary policy directed towards managing the inflation rate will also impact indirectly on issues such as unemployment.
On this matter, A. W. Phillips, a respected Keynesian economist, discovered a relationship — a trade-off — between inflation rates and unemployment rates. This trade-off is illustrated in the “Phillips Curve”, demonstrating how management of monetary policy (in particular the rate of inflation) has clear, predictable effects on the rate of unemployment.
Given the crucial role central banks play within national economies, one might wonder why numerous central banks across the world operate independently of political institutions? However, governments have demonstrated themselves to be frequently unreliable in their management, failing to act in an impartial manner. This understanding of the nature of governments is substantiated by two economic factors: the first concerns the level of inflation, the second relates to the so-called ‘inconsistency problem of monetary policy’. We will now consider both of these in turn.
This Index – offered by Grilli V., Masciandaro D., Tabellini G., Malinvaud E., Pagano M., 1991, Economic Policy – shows the relationship between rates of inflation and the level of political independence enjoyed by central banks. The data shows that often when governments held indirect power to determine the monetary policy through control of central banks, inflation rates have been excessively high. This can largely be attributed to governments attempting to maintain low unemployment rates, in spite ofprice increases.
Former Nobel Economic Prize Laureates, F. Kydland and E. Prescott, presented “The Time-Inconsistency Problem of Monetary Policy”, demonstrating the lack of credibility shown by central banks when associated with government bodies. This issue is caused by the inconsistency that a Central Bank can have between announcing and implementing a certain monetary policy, in relation to the effects that both the announcement and the implementation have on the behavior of the economic agents. Such a dynamic can be explained thus: if a central bank cares mainly about unemployment, perhaps as a result of needing to align with government policy, they may deviate from the announced inflation target after wages have been fixed. This inconsistency ultimately results in the same rate of unemployment but higher inflation, as economic agents anticipate such behavior from the central bank. Therefore, no incentive is needed for central banks to deviate, so they have to care mainly about inflation and be completely independent from the national government and the political cycle.
Furthermore, in view of the increasing role that public debts play in the maintenance of the political and economic stability of societies, the independent status of central banks has become crucial for the credibility of a political and economic system. By intensifying their requests for national and international markets to finance government deficits, the governments themselves have become actors in the market economy. Thus, if governments retain control over central banks there would be a conflict of interest. The debtor (the government) could in theory control the inflation rate, thus diminishing the value of its own debt which it owes to the creditor (the citizens). In short, governments tend to exhibit inflationary bias. So in this scenario, who controls the controller?
The economic conclusion, presented in the Gordon-Barro Model (which has arguably inspired the political choices of contemporary institutions), is that independent central banks should aim to be ‘conservative’ and not ‘discretional’ if they are to achieve their goals. Adherence to mandates is crucial and punishment is suggested for central banks that exceed recommended inflation rates. Indeed, the ‘independence’ of central banks is often granted by their own statutes with binding provisions which they have to comply with (for example, The Central Bank’s Statutes).
It should be noted that this characteristic – the effective independence of the monetary authority – is one of the central pillars of the European Monetary Union (EMU). It is also one of the ‘Maastricht Criteria’, which all countries must adhere to in order to access the monetary system of the European Union.
If a central bank is truly independent, there is a clear division of competences: the central bank is responsible for implementing monetary policy, while the government implements fiscal policy. Such a division, outlined by economist R. A. Mundell in the principle of Effective Market Classification, is not only politically desirable but economically more efficient. However, such a division can create problems with coordination between and effectiveness of monetary and fiscal policy. This problem is particularly relevant in an integrated monetary union such as the Eurozone and the European Union, where there is one monetary policy for 19 (for the Eurozone) and 28 (for the EU) different and often divergent fiscal policies.
New Time Inconsistency Problems can also be registered: inconsistencies between political choices and the economic cycle and between the fiscal policy (usually long in the decision-making and short in the effects) and the monetary policy (short in the decision-making but long in the effects).
Therefore, even if central banks are ‘independent’ and not held politically accountable, it can also be argued that such independence is in the interest of the citizens. Central banks are still strictly limited by their own mandates and objectives, embedded within their statutes. These they must respect, regardless changes to the wider political climate.
The current tensions between the European Central Bank and certain Eurozone Governments – for example Germany – is a clear example of what has just been argued. ECB Governor, Mr. Mario Draghi, has clearly stated that the Central Bank does not follow the policies of a single government. It looks instead at the economic and monetary outlook of the Eurozone as a whole, in order to reach and promote inclusive policies. However, in order to achieve economic effectiveness of monetary policies within the Eurozone, a process of economic convergence among economies is needed because one monetary policy cannot serve 19 – or 28 – different macroeconomic outlooks.
We live in an increasingly interdependent world. Such increased interconnection between countries influences the action of even the most independent authorities in our system. We can refer to this phenomenon as “The economic butterfly effect”. Even small changes within monetary or fiscal policy in one country, can have a larger, sometimes divergent, impact upon the economies of other countries. This is currently the case both for economic giants as well as developing countries.
For example, the whole world is impacted by US Federal Reserve monetary policy. The US Federal Reserve is simultaneously influenced by currency relations between the US Dollar and Euro, and is therefore to some extent influenced by Frankfurt’s choices (home to the European Central Bank). This is the reality of the financial and monetary interdependence in which we live. As the Global Financial Crisis has shown, globalisation can easily become the vehicle through which crisis can smoothly overtake national borders and spread globally.
The Governor of the Reserve Bank of India, Mr. Raghuram Rajan, recently published an article on the World Economic Forum website: ‘Why the world needs new monetary policy rules”. The writer clearly affirms the reality of interdependence of monetary institutions, underlining its negative potential. He writes: “If governments respond by enacting policies that divert growth from other countries, this “beggar my neighbor” tactic will simply foster instability elsewhere’. He reported this issue also to the monetary institutions and envisioned an agreement on the legitimacy of monetary rules, both conventional and unconventional. He said “‘we need are monetary rules that prevent a central bank’s domestic mandate from trumping a country’s international responsibility. To use a traffic analogy, policies with few adverse spillovers should be rated “green”; those that should be used temporarily could be rated “orange”; and the policies that should be avoided at all times would be red’. Thus, Independence of central banks from governments is needed however, this ‘independence’ would be better described as an ‘inter-independence’ in the framework of an integrated global economic system.
Let us conclude this section with Mr. Rajan’s words: ‘Setting the rules will take time. But the international community has a choice. We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. Or we can start building a system fir for the integrated world of the twenty-first century’.
The Case of European Union: Inter-governmental Organisation, Technocratic Apparatus or Transnational Democracy?
The EU today represents the most advanced experiment of inter-national, transnational integration in the world. The EU has changed its architecture, structure and nature through the ratification of numerous treaties. The Treaty of Lisbon, signed in 2007 and brought into force in 2009, empowered European Institutions, awarding new law-making powers to the European Parliament and MEPs.
The EU has been considered a hybrid due to its functional differentiation: the competences and prerogatives of the Union change according to the topic of discussion. This hybrid nature is the result of a compromise between three divergent ways of envisioning the European Community: the first views the Community as purely inter-governmental; the second a communitarian entity, with independent institutions at supra-national level; the third a federation with gradual sovereignty transfer from nation states to the Union in key matters. The Treaty of Maastricht (1993) formalised this approach in the three pillar structure (made up of the ECSC, Euratom and the EEC). Nowadays, however, it appears that this compromise between differing views of the European Community may block the EU’s ability to resolve challenges, thus jeopardising its effectiveness.
The creation of the EU has generated several political bodies which do not represent the nation states’ interests directly, but instead represent the common interest of the twenty-eight member states. Within the Treaty of Lisbon, there are seven political bodies outlined: the European Parliament, the European Council, the Council of the European Union, the European Commission, the Court of Justice of the European Union, the European Central Bank and the Court of Auditors.
The European Council, the Council of the European Union, the European Parliament and the European Commission represent the aforementioned compromise. The European Council and the Council of the European Union are intergovernmental bodies. The European Council consists of heads of state or government; the Council of the European Union is represented by the governments of thee twenty-eight EU member states; the European Parliament is an (imperfect) expression of the European democratic process, directly elected by EU citizens; and the European Commission represents the interests of the Union as a whole. Frictions between the bodies are a frequent occurrence.
The so-called ‘Democratic Deficit’ of the EU has been one of the central problems of the Union. This issue was addressed on a formal level in the Lisbon Treaty, which awarded new legislative procedures to the European Parliament, the only directly elected body of the European Union. However, Brussels continues to be viewed as dominated by ‘technocrats’ who occupy decision-making positions within the EU. The Commission, for instance, which is considered as the EU’s Executive Body, has policy-making capabilities, but it is on the other part held accountable by the Parliament, even if with weak tools or hard procedures.
There are cases in which the accountability and democratic legitimacy of the European Union is called into question. Take, for example, the so-called ‘comitology’, formally known as the ‘committee procedure’, used for the deliberation on certain kind of acts. In these cases, the legislation is deeply influenced by standards, targets and contributions that are not given by the EU Parliament but by ‘experts’. Another case which has triggered the public opinion is related to the procedures for the negotiation of International Agreements or Treaties between the EU and third parties, whose conducts are not always clear or accountable, as the recent polemics on the TTIP – Transatlantic Trade and Investment Partnership between the United States and the European Union, has shown.
On the other hand, although the powers given to the European Union are undeniably strong in certain areas (such as monetary policy, economic strategy and fiscal limitations) national governments have on a number of occasions blamed EU diktats for their own political mistakes or misconduct.
Problems frequently arise as the result of time incompatibilities between the electoral-political cycles and the structural impact of a certain reforms. While the European Union expresses no official interest in national political cycles, it goes without saying that national politicians are heavily influenced by national politics. This gives a strong, credible voice to EU bodies, when and if their political directives and strategies are correct and meet the common interest of the people. In the words of the former Prime Minister of Luxembourg, currently the President of the European Commission, Jean-Claude Juncker ‘We all know what to do; we just don’t know how to get re-elected after we’ve done it!’. However, former Italian Statesman Alcide De Gasperi (also considered to be one of the founding fathers of the European Union) once said: ‘A politician […] thinks of the next election; a statesman of the next generation. A politician looks for the success of his party; a statesman for that of the country’
We might conclude that even if the goal of successfully building up a transnational democracy such as the European Union is a far from complete, it has overcome numerous threats and difficulties to achieve a notable degree of success. These successes must be built on and democratic tools improved through the empowerment of democratic institutions and the strengthening of accountability procedures for technical bodies.
The concept of independence, both in terms of intergovernmental cooperation and in reference to standalone political agents or organisations, must be defended in certain circumstances. As we have seen in the case of central banks, independence from government can be technically desirable if we are to avoid conflicts of interest and manipulation of inflation rates.
In other cases, standalone can be politically desirable or undesirable. However, such a choice must be taken on a case-to-case approach and by designing an appropriate institutional structure and not on a merely ideological basis.