When the ECB was created, it was intended to be an independent and apolitical institution that would oversee the running of the single currency. Kathleen R. McNamara argues, however, that far from dealing with purely technical issues, the ECB is the key player in a crisis that is inherently political. Its actions have significant distributional effects, yet the ECB does not have a robust political framework for contestation and debate about those effects. Without broader political union, it is impossible for the ECB to be fully legitimate.
The muscular remarks last week by European Central Bank (ECB) President Mario Draghi pledging his institution’s commitment to do “whatever it takes” to save the euro got plenty of attention across Europe and the United States. It also demonstrated yet again the critical role being played by the ECB in the unending saga of the Eurozone crisis. Founded as a hyper-independent central bank and given a narrow mandate to fight inflation and protect the value of the euro, the ECB has been playing a dramatically more political role than that initially assigned by its creators. The ECB has been the key actor keeping Europe from financial meltdown, but its actions highlight the unsustainable political design of the monetary union, and the EU more generally. Fixing this political flaw, rather than doubling down on more technocratic solutions that fetishize austerity, is the central task for European leaders.
The EU has a very particular challenge when it comes to convincing financial markets about its future solvency and economic credibility. The euro was created in a breathtakingly bold act of political innovation, but it has been plagued by a serious political deficit from its début. The key problem lies in the disjuncture between a very developed monetary union centred on the ECB, and the vestigial political development of the EU more broadly. Despite the hopes of EMU’s designers that an independent central bank with a mandate to keep inflation low and defend the European currency at all costs would be enough to charm markets, the EU’s odd mismatch between a sovereign European currency and nationally sovereign fiscal and banking policies has proved disastrous once hard times hit. Historians are not surprised: a single currency without a single fiscal authority and political power at the centre of a political union is unprecedented. All functioning single currencies have been created as part of larger state building projects, where transfers of political power made the decision to unite into a single currency an expressly and inescapably political act, along with fiscal centralization. It is hardly surprising that investors are thus doubtful about the EU’s hodgepodge of governance and the commitment of Eurozone members to weathering the crisis together.
Paradoxically, the ECB was explicitly designed to circumvent the historically cosy relationships between markets and politics. The economists and ‘eurocrats’ who drew up the ECB’s rules, and the political elites that agreed to them, all had their eyes fixed on the last economic war—the horrible period of stagflation that began in the 1970s. Economic theories of the “political business cycle” and rational expectations theory called for an end to using monetary policy to stimulate growth or employment. In this view, little was given up by removing the ECB from the political fray. In the 2000s, with the flourishing of the Eurozone, it seemed that macroeconomic policy in the EU could be treated as purely a technical matter, like traffic rules, that need not engage partisan and distributional debates.
The drama of the euro’s crisis has, however, exploded the notion that central banks and monetary policy are apolitical in nature. Delegating authority to technocrats and intentionally stripping out democracy from an independent ECB seemed like a great idea at the time, but the fairy tale came to an abrupt end when the ECB stepped up to play a critical political role in the salvaging of Europe. The ECB has been front and center in the battle to save the euro, and its interventions, institutional innovations, and policy proposals have proved to be both novel and surprising. These actions have been successful at holding off financial Armageddon so far. But they have not been uncontroversial, viewed by some inside and outside the bank as poisoning the financial stability of the ECB itself and likely to produce an uncontrollable rise in inflation in the EU.
Even those who might applaud aggressive action to stabilize the European economy should be worried about the process by which the ECB has been assisting in the salvaging of the EU. As intelligent and well meaning as their officials may be, are we comfortable with an institutionally undemocratic institution calling the shots in a situation that is deeply and inherently political, implicating how scarce public resources are used, money spent, and who gets what part of the economic pie? Monetary policy, like regulatory policy or any other realm of policymaking has distributional consequences that demand broader democratic conversations about the values and goals of a polity and the social choices that its citizens wish to make. Democracy is messy, but it has the overriding benefit of creating legitimacy by opening up to contestation and discussion all the wrenching trade-offs that must be made.
The rise of populist parties in the EU, and the fervent public conversations about the costs and benefits of the euro, only reflect a long simmering debate, one that is best undertaken within strong democratic institutions, something lacking in the EU. Central bank independence is offset, in national settings, by robust institutions–a legislature and finance ministry or treasury–whose very roots are in the democratic, partisan process. With those partners, a national central bank, even if independent, will engage and interact and, ultimately, be more fully supported in its decisions. Without them, it is impossible for the ECB to be fully legitimate, despite being responsible for policies hugely consequential for the lives of European citizens.
Despite the heroics of the ECB, the EU desperately needs to ramp up its legitimacy to somehow drag itself out of the cataclysmic mess it is in. Until then, the EU leaders will have little luck in getting their stressed-out publics, or financial markets, to have faith in the solutions they are offering.
Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
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Kathleen R. McNamara – Georgetown University
Kathleen R. McNamara is an Associate Professor of Government and Foreign Service and Director of the Mortara Center for International Studies at Georgetown University. She is an expert on the politics of international economic relations, specializing in the European Union, the Euro and the European Central Bank. She is the author of “The Currency of Ideas: Monetary Politics in the European Union” (Cornell University Press, 1998), co-editor of “Making History: European Integration and Institution Change at Fifty” (Oxford University Press, 2007) and has published numerous essays on globalization, economic institutions, and the role of norms and culture in policymaking. Her current book project, entitled “Imagining Europe” investigates the social construction of political authority in the European Union, through the use of culture, symbols and practice.