Why Is the ECB Politically Independent?

The recent decision by the German Constitutional Court has triggered an avalanche of commentary about the primacy of European law and about the political independence of the European Central Bank. These are important issues for debate. I am persuaded by colleagues like R. Daniel Kelemen, for example, that you cannot have a ‘rule of law’ in Europe without a clear hierarchy of legal interpretation. Hence, while I can see the point being made by the German constitutional court about its obligations to uphold the constitutional rights of German citizens, I can also see why the European Court of Justice would insist on having the last word in any assessment of whether a European institution acted within its European mandate.

By contrast, the debate about the political independence of the ECB has taken a detour. The focus lies too narrowly on whether complying with the German court would or would not violate the ECB’s political independence given the wording of the Treaty on the functioning of the European Union and the Statute of the European System of Central Banks. That focus is too legal and in any event crabwalks back into the debate about the primacy of European law. The focus should lie on why the ECB is politically independent instead. Along the way, we should ask whether that independence is necessary for the ECB to forge an effective response to the current economic crisis.

There is a long answer to this question that draws on books and articles I wrote over the past two decades on the democratic legitimacy of central bank independence, the challenges that arise when popular perceptions differ from policy performance, how the situation gets even more complicated when central banks adopt policies that create winners and losers more obviously than they influence the rate of inflation, and why central bankers themselves may dream of having some overarching political authority to support policy coordination. Along the way, I have also looked at the difficulty of unwinding unconventional monetary policies, the controversy that surrounds the definition of price stability, and the tensions that arise when ethical concerns become more central to the conversation than any financial engineering.

But no one has either the time or the patience to read through two decades of academic puzzling. That long answer is only important for those who want to understand why the short answer is so lacking in nuance.

The short answer is that the original arguments for central bank independence did not anticipate the kinds policies that central banks deploy routinely today; indeed, the policies that have become commonplace would have strengthened political objections to central bank independence on the grounds of democratic legitimacy. More important, there is no reason to believe that political independence is necessary (or even sufficient) for the success of those policies in times of crisis. On the contrary, central banks would be more effective in responding to the current macroeconomic disaster if they worked within a broader political strategy. If you do not believe me, just look at how often European central bankers insist on the importance of fiscal spending and lending guarantees to make their instruments work.

In turn, that strategy would work best with a clear hierarchy that put the politics on top of the monetary policymaking at the European level. Central bankers may bristle when their advice is not taken, but so do epidemiologists, generals, and trade negotiators. The arguments for central bank independence are not about the separation of powers; they are about improving the delivery of policy outcomes. Coordination is better than independence in moments of crisis – and politicians, not central bankers, will have to call the shots and accept the responsibility for the calls they make.

The bottom line is that we would all be better off if there was some mechanism for suspending the political independence of the ECB during moments deep uncertainty and economic crisis. Even central bankers would benefit insofar as they would be able to re-establish their political independence – and, more important, the legitimacy of that arrangement – once the crisis has passed. This is the lesson former Deputy Governor of the Bank of England, Paul Tucker, learned as a result of the last crisis; it is even more relevant today.

What this means in legal terms is that the European Council would be wise to find some way to create an exception to those clauses in the Treaty and the Statute that ensure the political independence of the ECB. It also means that the European Council would have to come up with a coherent economic strategy for responding to the crisis. Those things may seem unlikely, but they are nevertheless important for us to debate. If instead we focus more narrowly on whether the German constitutional court or any other political actor is impinging on the political independence of the ECB, we are more likely to find ourselves at the end of this crisis having abandoned the notion of central bank independence, full stop.

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