Should the European Central Bank lose its independence?


“Now many fear that the economic divide could turn into a political chasm” (The Economist May 21/ 27 2011)

The financial crisis has highlighted deeper political problems of the EMU; one of them is the democratic deficit.  The European Central Bank (ECB) which has a fundamental role in the European Monetary Union (EMU) is insulated from political scrutiny.  As a result its monetary policy has come under criticism; the public feels it is only idly watching the actions of the Institution (Shellock and Demos 2010, Peel and Wiesmann 2010).  This is pointed out by public demonstrations and poor transparency rankings for the ECB (De Haan et al. 2004, Barber 2010)

National political parties have brought the issue to attention, while causing swings of the electorate towards the extremes.  On the supranational level there is also an opinion that some form of “gouvernement economique” (Henderlein and Verun 2009, Puetter 2004 ) should take place. Nevertheless, many have pointed to some obvious risks.  Firstly, political parties might adopt popular policies, for example loose monetary policy that can be detrimental for the EMU economy (Buti and Van Den Noord 2004, Mayes and Viren 2004, Sadeh 2009).  Direct initiatives and mandates coming from the electorate can cause problems; California is such an example (Economist 2011).  Furthermore, more voting does not necessarily mean more democracy.  After all, there is justification in the public acting as a principal and placing monetary policy to an agent institution (Tallberg 2000).  Secondly, adding political colors to monetary policy is likely to produce cleavages within the EMU and the European Union, further deepening the schism between Core and Periphery. 

As the crisis hits harder the Periphery of the EMU, the current counter-inflationary policy of the ECB is becoming harder to justify politically.  Though it is highly unlikely that Member States will break away from the Eurozone for this reason, a solution is needed.  Could the ECB lose its independence? What would the likely scenarios be bearing in mind the divide of opinion within the EMU?

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