Senior Estonian central bankers to sit on fiscal watchdog

The Bank of Estonia's supervisory board has appointed two of the central bank's most senior economists to sit on a new fiscal council – an independent body tasked with assessing the country's fiscal policy.

European law requires each EU member state to have at least one independent institution that provides provide macroeconomic and fiscal advice to the government.

Estonia is establishing a six-member council for this purpose, which will feature a deputy governor from the Bank of Estonia, Ülo Kaasik, and the head of its economics and research department, Martti Randveer.

The membership will be completed with two academics – including professor Raul Eamets, from the University of Tartu, who will chair their meetings – one think-tank analyst, and the president of the American chamber of commerce in Estonia.

These institutions do not follow a particular format. Some in the EU – including the Netherlands' Bureau for Economic Policy Analysis – have over a hundred staff supporting their work. Others consist mainly of a few council members.

They also have different functions. The tasks they perform, and the impact they have on fiscal policy, varies depending on the power and independence they are granted by their respective governments.

The Estonian Fiscal Council will be responsible for assessing the macroeconomic forecasts of the state, and how well it follows the budget rules laid out in national and European law. It will meet "whenever necessary" but no less than five times a year.

The involvement of the Bank of Estonia is somewhat unusual. Many of the larger institutions in the EU are run by full-time staff, while it is uncommon for part-time council members to be drawn from central banks.

Given their macroeconomic expertise, there are clearly benefits in appointing people with experience in central banking to these institutions. Many have.

Ivan Šramko, for example, was appointed chairman of the Council for Budget Responsibility in Slovakia in 2012, two years after he had served as governor of the central bank.

A few councils do count serving central bankers among their members. Razvan Victor Stanca, a senior economist at the National Bank of Romania, is deputy chairman of the Romania Fiscal Council.

Central Bank of Hungary governor György Matolcsy also sits on the Fiscal Council of Hungary – although this is highly unusual. An International Monetary Fund (IMF) study last year found the council's "independence and effectiveness was significantly curtailed before it had an opportunity to impact policies". Matolcsy, meanwhile, is a former finance minister.

Setting aside the unorthodox Hungarian situation, there may still be a potential conflict of interest for central bankers tasked with assessing fiscal policy.

Former Bank of England governor Mervyn King noted in 1995 that "central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy".

This is because, he explained, monetary policy does not exist in a vacuum. Greater fiscal discipline can raise the credibility of monetary policy, which may create a bias among central bankers towards smaller budgets.

In Estonia, the bill underpinning the fiscal council insists its members "may not have a job or other position that could affect the independence of the council in its work".

This work does not appear to – as it does in other parts of the EU – include advising the government on how to set fiscal policy. The council will fulfil more of an auditing role, which limits the likelihood of a conflict of interest arising.

A spokesman for the Bank of Estonia told CentralBanking.com that the central bank's independence was not in question. "We have excellent track record in providing independent and accurate assessment on matters of fiscal policy. The same goes for our employees," he said.