The Political Independence of the ECB in Question

The political independence of the European Central Bank rests on three fictions.  The first is that the ECB will make better policy over the longer-term than political considerations would dictate in the shorter-term.  The second is that the costs of ECB monetary policy decisions will not fall consistently on the same groups.  And the third is that disagreements within the ECB and its Governing Council are essentially technical and not political, meaning they are about how the economy really works and how it can best be managed, and not about who wins and who loses from one monetary policy decision to the next.  These are fictions insofar as they rest on the assumptions that monetary policymakers are not politicians, that money is neutral over the longer-term, and that technical disagreements are somehow distinct (or distinguishable) from self-interest.  The decision to appoint politicians to the top positions at the ECB because of their political skills challenges those assumptions.  Along the way, such appointments necessarily bring the political independence of the ECB into question.

Christine Lagarde is an eminently qualified politician with a proven track record for handling difficult economic dossiers in challenging times.  She demonstrated her political skills as French Finance Minister during the economic crisis.  She took over the leadership of the International Monetary Fund in the wake of a major scandal surrounding her predecessor and in the face of significant challenges to that organization’s legitimacy both in terms of its representation of global interests and in its handling of the crisis in Greece.  By all accounts, she has deftly managed her role.  The fact that she has done so while fending off a legal challenge back in France is all the more impressive.  Lagarde is world class.

But Lagarde is not a technocrat.  Her legitimacy comes from her ability to navigate competing interests.  She is a consummate negotiator who can bring together disparate conflicting parties and help them get to ‘yes’.  She is also a very able communicator who can explain to the outside world both how the sausage is made and why it is still worth eating.

These are skills that any central banker must admire.  Indeed, Mario Draghi has a very similar skill set and that is what sets him apart in the central banking community.  Mark Carney comes close as well, except perhaps when he is making offhand remarks about the European Commission President.  The point to note, however, is that the political skills possessed by Draghi and Carney are what makes them great central bankers.  Those skills are not what makes them central bankers.  Instead, you should look into their economic training and their business background.  Draghi and Carney are paid up members of the club.  That is why they can pretend to be separate from politics.  Their status as technocrats gives them a legitimacy that is very different from the legitimacy Lagarde possesses.

This distinction between technocratic and political legitimacy will seem to many to be a too-subtle form of academic hair-splitting or intellectual soft-pornography: 50 shades of grey.  If you imagine the role of the European Central Bank President to be to reconcile competing interests, to allocate winners and losers, and to sell whatever decision the Governing Council makes, then it only makes sense to pick a skilled politician with a knack for handling complex negotiations.  The problem with that notion of the role of the ECB President, is that it makes it very hard to explain why the central bank should be politically independent.  How can we know that such an ECB President will not respond to short-term political considerations?  How can we be sure that some groups will not always lose out from the decisions that are made?  And why should we not have more transparency on the Governing Council’s deliberations so that we can see how different interests are represented, with what arguments, and by whom?

To understand why these questions are important, imagine a hypothetical scenario where the European economy slows down and the ECB responds by lowering the deposit rate even further and restarting its asset purchasing program.  This is the scenario that many market participants are already pricing in.  From a German perspective, you have an Italian at the head of the ECB about to hand over to a French woman who was appointed because of her political acumen.  She is supported by a former Spanish Finance Minister who was also appointed for his political prowess.  Moreover, both of these political appointments support the decision to add monetary stimulus.  They are opposed by a President of the Bundesbank who has a lifetime of experience in central banking.  They are also opposed by a German representative on the ECB Executive Board who is a lawyer specialized in banking supervision.  This opposition will be well-known because of leaks from the deliberations.  But the arguments and voices in favour of the policy will be opaque.  The optics in such a situation pit politics against technocracy.  Moreover, those optics do not have to be the reality of the situation; they just have to be perceived that way to undermine the legitimacy of the Governing Council’s policy decision.

The argument for central bank independence always rested on fiction.  But it was rational to believe that fiction – to borrow from Kathleen McNamara – so long as the result was better policy.  The appointment of politicians to the top of the ECB, no matter how qualified and no matter for what reason, makes it much harder to support that ‘rational fiction’.  Such politicians may bring skills to the ECB that are desperately needed.  But they also call the political independence of the ECB into question.  It may be only a matter of time before people start demanding that the ECB’s political independence be taken away.

This piece was originally published on the Survival editors’ blog at the IISS. For the edited version, go here.  The banner image is borrowed from the IISS website.


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