Blog Post

The Eurosystem – Too opaque and costly?

The Eurosystem gets a lot of attention from academics and the media, but they largely focus on its statutory objective of maintaining price stability. There is much less interest in its transparency and operational efficiency. We analyse these issues, and find that the Eurosystem is less transparent and operates with significantly higher costs and headcount than the US Federal Reserve System.

By: and Date: November 6, 2017 Topic: European Macroeconomics & Governance

This blog post is based on a report that was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 25 September 2017 between ECON and the President of the ECB.

The European Central Bank (ECB) and the Eurosystem face a lot of scrutiny when it comes to monetary policy, but their operational performance attracts less attention. Still, being a public institution, the ECB and the 19 National Central Banks (NCBs), which together form the Eurosystem, have to justify their methods and costs. Thus, this blog post will assess the decentralised implementation of monetary policy by the Eurosystem with particular emphasis on its transparency, operational efficiency, and simplicity. When appropriate, we compare the Eurosystem to its most similar counterpart, the Federal Reserve System (Fed) of the United States.

Transparency

Despite some recent improvements (see Table 1), the ECB’s transparency falls behind the Fed on core monetary policies.

In fact, while the ECB discloses quite substantial (albeit yet not complete) information on its liquidity management (MRO, LTRO, TLTRO), it is much less transparent about its quantitative easing programs. In contrast to that, the Fed publishes more data about the current state of its quantitative easing programmes and even discloses a complete transaction log with a delay of two years.

The Eurosystem also provides very little information regarding its Emergency Liquidity Assistance (ELA). Again, the Fed is more transparent by publishing current amounts as well as historic transactions (with a 2-year delay). Table 2 provides a summary comparison between the Eurosystem’s and the Fed’s transparency in important operations.

Table 2: Information provided by the Eurosystem and the Fed for selected operations

In addition, substantial parts of the information presented by the ECB (and the NCBs) are user-unfriendly and difficult to process for further analysis.

Operational Efficiency

The term efficiency describes the amount of resources used to reach a certain goal. Unlike the case of a company, where revenues and costs can be compared, there is no straight-forward metric to assess the efficiency of a central bank. Thus, we decided to assess the Eurosystem’s operational efficiency by analysing its operational costs against its tasks.

Based on figures published in the annual reports of the ECB and the 19 NCBs, we estimate that the Eurosystem has aggregate operational costs of about €10 billion, of which close to €1 billion is generated by the ECB (in 2016). The total staff size of the Eurosystem and the ECB amounts to over 48,000 and 3,100 units respectively. Compared to the Fed, the Eurosystem employs almost twice as many people (Figure 1) and has operational costs that are twice as high as those of the Fed.

Figure 1: Population and NCB headcounts (2016)

Source: ECB and NCBs’ websites; Fed Annual Report (2016); World Bank
Notes: Both axes are shown on a logarithmic scale.

Of course the Eurosystem’s and the Fed’s tasks are not totally comparable, but it is still sensible to assume that the costs of the Eurosystem are considerable higher due to its institutional structure. The Eurosystem consists of 19 NCBs and the ECB while the Fed consists of 12 Federal Reserve Banks, the Board of Governors, and the Federal Open Market Committee.

Simplicity

 Based on the European treaties, the Eurosystem implements its monetary policy in a decentralised way. Compared to a centralised implementation, as seen with most central banks, the Eurosystem’s implementation is inherently more complex.

Table 3 gives an overview of which NCB is responsible for implementing which quantitative easing programme of the ECB. As depicted in the table, the set of NCBs is different depending on the programme, and no clear pattern of implementation can be deducted. On top of this, the Eurosystem does not disclose the decision rule that led to the above-mentioned scattered implementation.

The Fed has a far simpler implementation structure. All monetary policies, decided by the Federal Open Market Committee, are implemented by the Federal Reserve Bank of New York.

Recommendations

Based on our analysis, we can identify several ways in which the ECB and Eurosystem could improve transparency and efficiency.

Regarding transparency, we suggest that the Eurosystem should take the Fed as an example and disclose more information on its monetary operations. If information contains sensitive material, we suggest releasing the information with a delay.

To increase transparency and strengthen accountability, the ECB and the eurozone NCBs could disclose full information on operational cost and staff headcounts, disaggregated by unit and function. We believe that silos between the NCBs should be broken up and that the ECB should serve as a data portal for the whole Eurosystem. Thus, we suggest that the ECB collects data about monetary operations as well as costs from all 19 NCBs and publish this data on the ECB’s website in a coherent form. If this is not feasible, we propose that the ECB should publish a common annual report of the Eurosystem that contains the most crucial information on costs and headcount of the entire Eurosystem (inspired by the Fed).  We suggest that the Eurosystem publishes its reports at least in a harmonised way/design.

The operational efficiency of central banks is hard to measure, as it is not clear to which metric its cost should be compared. But our estimates, however rough, suggest that the Eurosystem is costlier than the Federal Reserve. This is not surprising as the Eurosystem is more decentralised than the Fed. Thus, we recommend bundling more (monetary) policy actions on a lower number of central banks. In addition, we suggest continuing to reduce the Eurosystem’s costs, which will imply a reduction of staff numbers, intensifying the action pursued over the last few years.

The decentralised nature of the Eurosystem, as established by the European treaties, creates a certain degree of intrinsic complexity. Therefore, a simple and centralised implantation of monetary policy would not be in line with the treaties. However, we argue that the Eurosystem could achieve more simplicity in the current treaty regime by assigning certain functions to certain NCBs in a systematic manner (specialised NCBs). In addition, we strongly suggest that the Eurosystem discloses information on its decision rules on implementation.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Opinion

Can virtual currencies challenge the dominant position of sovereign currencies?

Marek Dabrowski and Lukasz Janikowski analyse why private money has historically failed in competition against sovereign currencies and what it means for modern virtual currencies, such as Bitcoin.

By: Marek Dabrowski and Łukasz Janikowski Topic: European Macroeconomics & Governance Date: December 15, 2018
Read article More on this topic

Blog Post

Does the Eurogroup's reform of the ESM toolkit represent real progress?

The deal reached on euro-zone reform at the December 4th Eurogroup is not ground-breaking. However, it contains a number of incremental but potentially key technical reforms – in particular regarding the ESM toolkit. Some constitute an improvement, but there are also clear flaws that should be corrected at the Euro Summit.

By: Grégory Claeys and Antoine Mathieu Collin Topic: European Macroeconomics & Governance Date: December 13, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

Forecast errors and monetary policy normalisation in the euro area

What did we learn from the recent monetary policy normalisation experiences of Sweden, the United States and the United Kingdom? Zsolt Darvas consider the lessons and analyse the European Central Bank’s forecasting track record and possible factors that might explain the forecast errors.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 13, 2018
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Consequences of European Central Bank forecasting errors

Bruegel senior scholar Zsolt Darvas speaks about his review of systematic errors in ECB forecasting, in another instalment of the Deep Focus podcast on 'The Sound of Economics' channel

By: The Sound of Economics Date: December 12, 2018
Read article Download PDF More on this topic More by this author

Essay / Lecture

A new statistical system for the European Union

Quality statistics are essential to economic policy. In this essay, Andreas Georgiou demonstrates the existence of fundamental risks inherent in the European Statistical System. He argues that a paradigm shift is necessary and sets out a model that would deliver the quality statistics the European Union needs.

By: Andreas Georgiou Topic: European Macroeconomics & Governance Date: December 12, 2018
Read article More on this topic

Blog Post

Providing funding in resolution: Unfinished business even after Eurogroup agreement on EMU reform

The recent Eurogroup agreement on euro-area reform foresees a greater role for the European Stability Mechanism (ESM) as a backstop to the banking union. This is a welcome step forward but important issues remain. We assess the agreement on how to fund banks after resolution and the best way to organise the fiscal role in liquidity provisioning to banks. We argue that the bank resolution framework will remain incomplete and its gaps could result in important financial instabilities.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 7, 2018
Read article More on this topic More by this author

Blog Post

ECB’s huge forecasting errors undermine credibility of current forecasts

In the past five years ECB forecasts have proven to be systematically incorrect: core inflation remained broadly stable at 1% despite the stubbornly predicted increase, while the unemployment rate fell faster than predicted. Such forecast errors, which are also inconsistent with each other, raise serious doubts about the reliability of the ECB’s current forecast of accelerating core inflation and necessitates a reflection on the inflation aim of the ECB.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2018
Read article More on this topic

Blog Post

The international role of the euro

The authors assess whether the euro area should pursue a greater international role for the euro, as outlined by European Commission president Jean-Claude Juncker, and how it might go about doing so.

By: Konstantinos Efstathiou and Francesco Papadia Topic: European Macroeconomics & Governance Date: December 3, 2018
Read article More by this author

Blog Post

Green central banking

A few weeks ago, Silvia Merler discussed the rise of “ethical investing”. A related question emerging from the discussion is whether central banks should also “go green”. Silvia reviews the latest developments and opinions on this topic.

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: December 3, 2018
Read article More on this topic

Opinion

What the "gilets jaunes" movement tells us about environment and climate policies

Simone Tagliapietra and Georg Zachmann write on the climate governance lesson European governments should learn from the "gilets jaunes" experience.

By: Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Date: November 30, 2018
Read article Download PDF

External Publication

European Parliament

How to provide liquidity to banks after resolution in Europe’s banking union

Banks deemed to be failing or likely to fail in the banking union are either put into insolvency/liquidation or enter a resolution scheme to protect the public interest. After resolution but before full market confidence is restored, the liquidity needs of resolved banks might exceed what can be met through regular monetary policy operations or emergency liquidity assistance. All liquidity needs that emerge must be met for resolution to be a success. In the euro area, this can only be done credibly for systemically important banks by the central bank.

By: Maria Demertzis, Inês Goncalves Raposo, Pia Hüttl and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 22, 2018
Read article Download PDF

Policy Contribution

European Parliament

A monetary policy framework for the European Central Bank to deal with uncertainty

In this Policy Contribution prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue, the authors review the emerging challenges to central banks, and propose an updated definition of price stability and an adequately refined monetary policy framework.

By: Grégory Claeys, Maria Demertzis and Jan Mazza Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 22, 2018
Load more posts