The British ruling class once governed the world; now they struggle to govern the United Kingdom. The political parties are splintered, the people are divided, the institutions are in conflict, and the gap between England, Scotland, and Northern Ireland continues to widen. Worse, the British government has once again failed to negotiate to secure a majority in parliament to exit the European Union or to come up with a convincing plan for how to leave without one. Now the British head to the polls in the hopes that the people will deliver a clear verdict on how they want to proceed. The results may prove decisive. The worry is the voters may return another hung parliament — leaving the British ruling class to sort out what to do next.
Europe needs a ‘new narrative’ if it is going to move forward rather than falling back into crisis. That narrative cannot be a collection of policy initiatives or institutional reforms. New policies are important; so are new institutional arrangements. But politics and institutions do not by themselves speak to a democratic electorate – and particularly not to an electorate that has focused its attention on legitimate grievances of its own. Only politicians with a clear vision of the future can wield influence with voters in such a context. If the politicians with the best ideas are too afraid to forge a vision, they should not be surprised when voters attach themselves to politicians who run off in the wrong direction. Europeans deserve better political leadership; so does Europe.
Central banks are never independent from politics. The bankers who run those organizations may have the institutional power to define their own objectives, the technical capability to adjust the settings on their monetary instruments, and strong legal protections around the terms and conditions for their employment. But none of that is enough to insulate them from politics. Determined politicians will find a way to exercise influence, no matter what the obstacles. More often than not, such politicians will do so without even implicating the legislative process. They do not have to rewrite the laws to violate central bank independence. Politicians only need to take advantage of the fact that central bankers come from society, they (and their families) have to live somewhere, and eventually they will also retire.
Central banks have been in the news a lot lately, with Mario Draghi’s dramatic decision to redeploy the full range of unconventional policies alongside Jerome Powell’s more obvious ambivalence about loosening the monetary spigots. In part this is a function of timing. The business cycle is turning and yet central banks have not quite managed to reset their instruments after the last crisis. Part is also due to overload. Central banks have been ‘the only game in town’ for a long time, they have expanded responsibility for prudential oversight, and politicians seem none too eager to assume responsibility for macroeconomic performance. It would be a mistake, however, to focus too much on short term explanations. Three recent books explore some of the deeper forces that have pushed central bankers into the spotlight.
Seasoned observers of Italian politics will tell you that there is a fairly consistent pattern to political crisis. The pattern starts with infighting among the governing coalition; it accelerates suddenly when one of the coalition partners ‘pulls the plug’ on the government; and then things slow down again as the various stakeholders realize how much is at stake for them personally if they let things fall apart. Parliamentary seats are prestigious, the salaries are high, and the pensions are generous provided the members just stay in post long enough to qualify. More important, real crisis comprises a lot of work with very uncertain pay-offs to be gained from an often-fickle electorate. Meanwhile, bad things can happen to the country’s economy, particularly vis-à-vis the banks and bond markets. In such a context, it is only reasonable to expect that cooler heads will prevail. Given the possible threat that an Italian meltdown would pose for the future of the euro (and hence also the European Union), we should all hope these observers are right. Nevertheless, there are four good reasons to believe that this time is different.
At some point in the early months of 2007, the words ‘sub-prime mortgages’ began to filter into the popular press. By the end of that August, they were ubiquitous. This small section of the high-risk, high-yield housing finance market in the United States sparked a global financial and economic crisis that would scar a generation. The stories that emerged to explain how this happened were the stuff of fiction or perhaps something even stranger. Banks booked mortgages to people with no demonstrable assets or income, at introductory rates that quickly reset to terms that only the most resilient of households could afford. By the time the borrowers defaulted, however, the banks had sold the mortgages to other investors using complicated securitization instruments that effectively hid the risks involved. The institutions left holding the bag were not only unaware of the dangers the faced but completely unprepared for the consequences. In his powerful new book on The Political Economy of Housing Financialization, Gregory W. Fuller explains why that happened, how the dynamics differed across countries, and what we might do to anticipate similar crises in the future.
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.