Next year, Lithuania will join the eurozone as its 19th member. The direct impact of Lithuania’s accession will be negligible. The small Baltic nation only adds three million people and a GDP the size of Naples to Europe’s monetary union. At least numismatists can look forward to another set of euro coins.
On a different level, however, Lithuania’s entry into Europe’s monetary union will cause some concern for existing members of the eurozone. That is because under the rules agreed upon by the European Central Bank in 2003, the voting rights on its Governing Council will change. So far, the six members of the executive board of the ECB had a vote as well as all governors of the eurozone’s 18 national central banks.
In order to keep the ECB manageable in a growing monetary union, eleven years ago it was decided that when the eurozone reaches 19 members, voting rights among national central bank directors would rotate. The five largest members of the eurozone (Germany, France, Spain, Italy and the Netherlands) would have four votes between them, so one of them would be without a vote every five months. The 14 remaining members would have 11 votes, which means that three of them would have to pass each time. Should further members join in the future, the smaller nations would lose out even more, while the big five would continue to command four votes in total.
Though all this may sound like a technicality, the political implications are considerable. The issue is controversial, especially in Germany.
For a long time, the Germans have felt uneasy about the construction of the ECB. In a way, that is quite understandable. Though Germany is the strongest economy in Europe, and though it accounts for 27 per cent of the ECB’s capital, the governor of the Bundesbank has as much influence on ECB decisions as, say, the governor of the central bank of Malta.
That in itself was irritating enough in the good times when there were no controversial decisions to make. In the past years of the euro crisis, however, Germany’s central bankers were increasingly sidelined within the ECB. The differences between the Bundesbank and the ECB led to the resignations of Bundesbank’s President Axel Weber and the ECB’s German chief economist Jürgen Stark, both in 2011. The open confrontation then continued between ECB President Mario Draghi and the new Bundesbank President Jens Weidmann, who do not even try to hide their differences in diplomatic language.
After Lithuania’s eurozone accession, the loss of importance of the Bundesbank will reach another level. Thus far, the Bundesbank may have been in a minority position at the ECB, but at least it could vote. Now the Germans may not even be asked for their approval anymore when the ECB decides on their next measures to save European governments, banks or the eurozone at large. The risks of such policies, meanwhile, would still be borne to large degree by Germany.
Of course, this loss of importance will affect every other eurozone member as well, but no other country carries a similar liability risk. And none has been as isolated on the ECB as Germany. If France, Spain or Italy cannot vote anymore, it will not materially alter the picture because they are all in the dovish camp anyway. If Germany cannot vote, there will not be any hawks left.
Defenders of the new voting arrangement may say that even without voting rights, the Bundesbank representative may still speak at ECB meetings. That is true. But nobody would need to listen to them anymore.
Other defenders could argue that in a monetary union, it should not matter which nation gets a vote on the central bank’s council. All members of the council are, in theory, committed to the same goals and targets, especially regarding monetary and financial stability.
There is a difference between such monetary theory and ECB practice, however. National central bank governors may be asked to promote the greater good for the eurozone but they remain representatives of their own countries when they make decisions at the ECB. There are obvious differences even in the interpretation of monetary policy objectives across Europe. There are even more differences when it comes to the countries’ different monetary policy needs.
To expect all of these conflicts of interests to magically disappear when it comes to voting on the ECB’s council borders on naiveté. Of course they remain important, which raises the question why it was ever deemed acceptable to let voting rights rotate between eurozone members. The only reason is that back in 2003 no-one saw these conflicts coming — certainly not the only oversight in the construction of the euro.
But it’s too late to change the rules for the ECB. Not only would changes require unanimity for all members of the EU, but such a process involving treaty changes could also trigger referenda in a number of member states.
And of course, should the Germans demand different voting rules, others may demand something else in return — say, a different mandate for the bank. Where, at least in theory, the ECB is solely committed to achieving price stability, it could then be tasked with other policy objectives. Germany will not risk such an outcome in order to save its vote.
What is possible now is that future ECB decisions may become less steady and somewhat less predictable. Depending on who has the vote on the council, different coalitions will be formed and different outcomes will be possible.
That is certainly not the kind of central bank the Germans were promised when they entered monetary union. The ECB was supposed to be a Bundesbank-like institution, beyond political influence and with an ultra-orthodox monetary DNA. From this German-style central bank, the only thing that is left is the ECB’s location in Frankfurt.
Given Germany’s position as the largest shareholder in the ECB, it is astonishing how weak their control of its governance is. But for the result of their past carelessness in designing the ECB’s rules, the Germans only have themselves to blame.