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The Crisis of Central-Bank Governance

The European Central Bank may enjoy stronger protection against political pressure than other central banks do, but it also faces unique constraints. The more the ECB is forced to expand its policy remit to meet new economic challenges, the more likely it is to trigger destabilizing political conflicts within the eurozone.

LONDON – The relationship between monetary authorities and governments differs in important ways between the United States and the eurozone. The US invariably falls into a traditional pattern whereby governing politicians, with an eye toward the electoral cycle, tend to favor expansionary fiscal policies and looser monetary conditions, while the Federal Reserve, wary of political pressure, endeavors to assert its independence. If the Fed’s autonomy were called into question, domestic – and, by extension, global – macroeconomic stability would be jeopardized.

The pattern in the eurozone is the opposite of this. On the whole, fiscal policymakers are hesitant to pursue stimulus even in the face of an economic slowdown (as is the case today), and it is the European Central Bank that ends up trying to pressure others to act. This inversion of roles between governments and monetary policymakers has no historical precedent. It has occurred as an unexpected result of the eurozone’s design, and it now threatens to pose a persistent challenge to the bloc’s stability.

More broadly, both the US and the eurozone are experiencing symptoms of a crisis of economic governance that has been building for more than 30 years. In the US, the Fed’s independence is granted by Congress and could in principle be withdrawn, whereas the ECB’s independence is protected by the Maastricht Treaty. But this is of little comfort to Europeans, considering that the tension between European monetary authorities and member-state governments could ultimately undermine the consensus in favor of the single currency itself.

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