For decades, the independence of central banks has been viewed as the cornerstone of a prudent monetary and overall economic policy. Contributing to this was a whole perception that political interventions in monetary policy risked leading to dangerous experiments and economic collapse.
This is particularly pronounced in the case of the European Central Bank and the rest of the central banks of the Eurosystem, since here we are dealing with a central bank that is not even connected to any national state but is constituted directly at the European level, as it is based on demobilization by the member states of the Eurozone of their own publishing right.
In fact, this very element, that is to say the disempowerment of an element that was synonymous with the core of sovereignty in modernity, namely the ability for a country to issue its own national currency, has led many to consider that institutions like the ECB epitomize the real ” democratic deficit’ of the European Union.
This becomes even more pronounced if we consider that anyway the way in which the necessary independence of central banks is presented most of the time refers to the attempt to shield them against social demands and pressures, especially those coming from the most lower dispoasable income classes of the society (please also read the analysis titled “Today, the Democratization of the Banking System is more necessary than ever“).
The French economist, author and university scholar Éri Monet tackles some of these questions in his book “La Banque Providence: Démocratiser les banques centrales et la monnaie” (French Edition), Publisher Seuil (2021).
The evolution of central banks
Monet reminds that central banks traditionally tasked with the role of macroeconomic stability, financial stability, issuance of banknotes and supervision of payments, now also have a role in the ecological transition, the management of public debt and the introduction of new forms of digital currencies . It is in this context that how to restore the relationship – and legitimacy – between central banks and citizens must be considered.
Although central banks are traditionally linked to the financial system, after all they are the “banks of banks”, however according to Monet we should not overlook their role in ensuring the financing of modern states and their connection with the welfare state, an element which according to his opinion was reflected in the interventions to deal with the effects of the COVID-19 pandemic. Furthermore, it underlines that the interventions to deal with the potentially destabilizing effects of the financial markets, contribute to the support of the dimension of “de-commoditization” that is inherent to the welfare state. At the same time he is quick to remind the difference between a central bank and a public investment bank.
Monet recalls that central banks such as the ECB create money when they buy financial securities and lend to financial institutions, mainly banks. This led to the creation of huge amounts of money after 2008, which nevertheless did not lead to a rapid increase in inflation. However, he finds at the same time that this reinforces the swelling and uneven distribution of a mass of money in the financial system which, in combination with the trend towards privatization, can create problems.
Monet traces the change brought about by the ECB’s shift, within quantitative easing practices, to “targeted long-term refinancing operations”, meaning that, in a break with a certain neoliberal tradition, central banks have a say in what activities private banks will finance with the loan offered to them by the central bank.
At the same time, it stands in particular to the challenge posed by the creation of digital currencies of central banks, which in turn is an answer to the challenge represented by cryptocurrencies. And this is because a new field of digital monetary policy is being formed, especially since it is possible that various depositors will prefer the “digital account” at the central bank, rather than simple savings accounts at private banks. In this case questions are raised as to where this saving can be directed.
Can independence and democratic legitimacy be combined?
Monet insists that the independence of central banks can have democratic legitimacy, provided we overcome the illusion “of self-regulating markets and of a neutral role of the Central Bank in the operation of the latter”.
This means that we have to face the “democratic deficit of the euro” which lies in the fact that the ECB only discusses its options internally without being accountable to those who represent the European citizens, i.e. deciding for itself how to implement the mandate it he’s got. This means that there is no democratic consultation on its choices, no consideration of different views and no meaningful dialogue between the ECB and the European Parliament.
For Monet, a solution would be a Credit Committee at the European level, which would coordinate the various forms of action related to the financing of the European Union’s objectives and would give substantial legitimacy to the ECB’s decisions precisely because it would include the necessary reflexivity and consultation.
At the same time, Monet emphasizes the importance of coordinating the ECB’s monetary policy and fiscal policy, even if this means in marginal conditions what economists usually describe as “helicopter money”, i.e. transferring money directly to citizens to prevent a serious crisis.
The open questions
The importance of Monet’s book lies precisely in what it allows to open a discussion. In other words, it allows us to go beyond the current almost oxymoronic condition where, on the one hand, we insist on the independence of the central banks and the ECB itself in every possible way, and on the other hand, we place in it very important hopes that it will indeed carry out policy, marginally replacing governments in the role of producing policy.
Consequently, if we understand that the role of central banks is ultimately political, it is part of strategizing the problems of economic and social policy and is in no way merely “technical”, then we must look at the way in which they too institutions will acquire elements of accountability and increased permeability with the processes in societies and ultimately the very anxieties and expectations of societies in a contradictory and apparently transitional juncture.
