Constitutional Efficiency and the European Central Bank

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Constitutional efficiency, as opposed to the term "efficiency," used without the modifying adjective, applies the criterion for judgment to the operation of an institution over a whole sequence or series of separated instances rather than to the operation in a particular circumstance (Buchanan 2004). The notion here is related closely to the whole discussion about the efficiency or efficacy of rules as opposed to discretionary actions. Whereas the operation of a rule may almost always be improved upon in a particular circumstance, the relevant question is whether or not a rule might generate better results over a whole sequence of events than the exercise of event-by-event discretion.

We can think of an institution, such as the European Central Bank, as a rule in this sense, as an existing framework for monetary action, even if, within this framework, the specific actions are themselves emergent from discretionary decisions of the bank rather than from a rule, as such. To ask, then, whether or not the ECB is constitutionally efficient is to ask whether or not this institution, as it exists, can be predicted to generate results over a whole sequence of separate events and circumstances that are superior to those that might be expected to emerge under alternative institutional arrangements.

Two Distinct Steps

There are two distinct steps in any such evaluative inquiry, and these steps have not always been kept separated in discussion. First, there is the question concerning whether or not the ECB might be expected to generate a series of results that are superior to any that might have been produced had some alternative institutional structure been put in place. In other words, when the initial set of arrangements were being established, was the ECB the best structure? Second, there is the quite different question concerning whether or not, as it now exists in place, the predicted operation of the ECB is superior to an alternative set of monetary arrangements for the European Union. As posed in this way, it should be evident that an affirmative answer to the second question need not imply an affirmative answer to the first question.

The Initial Choice

My own position has long been to the effect that the EU missed out on a great opportunity to set up something akin to Hayek's competitive currency regime, even if limited to issue authority by separate national central banks. This arrangement would have been less dramatic to the public and, more important, would have placed restrictions on discretionary authority that do not now exist. But I emphasize that this is a response to the first question posed rather than the second. We start from the here and the now, from that which exists.

The Choice among Existing Institutions

The ECB and the euro are institutional realities. They exist. The relevant question then becomes the second one that I posed. Are these institutions superior to alternatives that might be put in place? And here my answer is positive. That is to say, the ECB does pass muster as being "constitutionally efficient" in this sense.

I am, in a sense, saying that, in this case, "whatever is, is efficient." But note that this judgment does not emerge from either of the two standard arguments--either the Hayekian resort to evolutionary survival or the modern Chicago extension of rational contracting. The euro and the ECB did not emerge from a long evolutionary process; nor do these institutions define an equilibrium attained from contractual agreement among affected parties. Instead, these institutions were quite explicitly "laid on," imposed as it were, by those who served in roles as constitutional agents for the emerging EU.

To argue that these institutions are constitutionally efficient must invoke both the costs of transition to any alternative set of arrangements and the relative efficacy predicted from the operation over time. …