Monetary Policy and the Irish Central Bank

On last night’s Prime Time report on quangos and inefficiencies in the public sector, reporter Donagh Diamond said:

The introduction of the euro abolished a major function of our central bank, the devising of monetary policy.   So we wondered where all the staff went.   Remarkably, the CB tells us that on the creation of the euro “The functions of the CB remained largely the same” clearly indicating that no staff went anywhere. 

As a former employee of the Central Bank, I have regularly had this point put to me over the past number of years—“What does the Central Bank do now?”    But this question, and Donagh Diamond’s comments, are based on a highly flawed understanding of how the ECB’s monetary policy operates.  

Monetary policy in the Euro Area is set by the Governing Council of the ECB, which has six members from the ECB Executive Board and sixteen Governors of the participating central banks.  The introduction of the euro did not “abolish” the central bank’s role in devising monetary policy.  Instead, it meant that the bank was involved in devising this policy in conjunction with the other members. 

Without doubt, some who have read this will say “But sure nobody at the ECB would listen to Ireland.”  This misunderstands how the Eurosystem operates.  A very large amount of the work is decentralised to participating central banks. For example, the Irish Central Bank does all the work on forecasting and collection of statistics that it always did.  

However, the individual central banks also now have to do more work on monitoring Euro-area developments because the rules of the Eurosystem state that the Governor’s vote on monetary policy must reflect Euro-area developments rather than just conditions in their home country. 

Beyond the misrepresentation of the work of the Irish central bank, I think these kinds of comment illustrate a general confusion among journalists and the public about what exactly the ECB is and what it does.  I would recommend that they could do a better job of explaining themselves to the wider European public.

9 thoughts on “Monetary Policy and the Irish Central Bank”

  1. Who decides to increase the money supply and by how much? Who decides on interest rate changes? Does Ireland have the same influence on these decisions as Germany?

  2. I once raised the same issue with a senior executive of the Central Bank of Belgium. His response was that, before the euro, their policy was to do what the Bundesbank did so their key staff were the German-Dutch and German-French translators. Since the euro, the ECB expects serious analysis, so they actually need more and better economists nowadays.

  3. the sad thing here is that it seems to justify having a central bank the same size (in staff) while nations embrace the euro system and the implied efficiency that should come with it, a pity that doesn’t feed through to staffing levels.

  4. There is public misunderstanding and confusion but there is no defence for the failures of the Central Bank.

    I started a thread on this issue in the Propertypin and you will see that no-one was willing to defend the CB. Even accepting the idea that it takes as many staff to offer monetary guidance as it does to actually manage a currency, the quality and effect of that guidance must now be questioned.

    http://www.thepropertypin.com/viewtopic.php?f=19&t=19247&hilit=+central+bank+what+is+good+for

    The Backroom column in today’s Business Post, in commenting on the departure of Junior Ministers, highlights the failures of public servants, particularly in the CB/Financial Regulator.

    Now that the Minister is about to decouple the CB and the Financial Regulator, it is forgotten that the CB fought a fierce battle to keep regulation under its umbrella. Recently, John Hurley is behaving as if he was not “Governor of the Central Bank and Financial Services Authority of Ireland”

  5. Joining the euro has screwed us big time. The ECB had deliberately kept interest rates far too low for the betterment of the Germany economy, which was going through a slump while our economy was overheating. This low interest rate helped create the property and credits bubbles.

    As for the Irish central bank. They’re useless. Another quango that can be dismantled.

  6. Who owns the Irish Central Bank and what individuals, institutions and companies profit from its activities?

  7. Can anyone answer Bert McCann’s question?

    Who owns the Irish Central Bank and what individuals, institutions and companies profit from its activities?

    Is it a privately owned institution intent on reaping profits for its owners or is it government owned and acting in the best interests of the people of ireland and indeed the world?

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