Taking central bank politicization seriously

JCMS | 6 July 2020

By Pier Domenico Tortola

The European Central Bank “needs a rocket scientist, not a rock star”, quipped the website Politico shortly after the nomination of Christine Lagarde to succeed Mario Draghi at the helm of the ECB, starting November 2019. The risk, the commentary continued, is that the presidency of Lagarde, a central banking outsider more renowned for her stellar political achievements than for her macroeconomic expertise, will bring about a dangerous “politicization” of the Bank.

That may well be. However, what seems forgotten in analyses like the foregoing is that it does not necessarily take a politician to politicize the ECB. Or at least this is what it would appear from the public debate on the ECB over the past decade or so, in which the (alleged) politicization of the Bank has been a recurrent narrative, particularly under the tenure of Draghi—an MIT trained economist.

Calling the ECB politicized is a strong accusation, which goes directly at the legitimacy and credibility of one of the most consequential European institutions. It is therefore surprising to see how foggy the term politicization remains, for all its use on both the hawkish and dovish side of the Eurozone crisis debate. What is it, exactly, that makes the European Central Bank political?

In an article recently published in the Journal of Common Market Studies I try to put some order and clarity into this issue by, first, reconstructing the ways in which the term politicization is currently employed. Looking at the existing literature and debate, politicization is used (more or less explicitly) in three ways, corresponding to deviations from three types of expected central bank behavior: the ECB is politicized if it violates, respectively, its independence, impartiality, or policy convention.

While each of these three meanings gives us some clues into the question of ECB politicization, none of them offers a solid enough basis for defining the concept, due to logical or empirical shortcomings. Seeing politicization as a loss of independence, for instance, sits uncomfortably with the several policy rifts between the ECB leadership and the German government—arguably the most powerful among the Bank’s principals—in recent years. Nor is defining politicization as a violation of impartiality much more helpful, given that virtually anything the ECB does (including, one could say, inaction) has some distributive effect. The idea of politicization as a departure from convention, finally, is only logically defensible if the latter is interpreted formally as the Bank’s legal mandate. But if that is so, does it really make sense to still speak of ECB politicization after both the Outright Monetary Transactions and quantitative easing, the Bank’s two most controversial non-standard measures, have been certified as lawful by the EU’s Court of Justice?

To exit this conceptual impasse, one then needs an alternative approach to ECB politicization, which can overcome the limits of the three conceptualizations just described, and provide common ground among them—therefore being able to function within and improve on the existing debate. For this, we need to shift the focus to the preferences of central bankers, and define politicization as a deviation from technocratic policy-making.

Like any other technocratic body, the ECB should move within a policy-making space located between zero and full autonomy vis-à-vis its political principals. On the one hand, the Bank needs enough room for manoeuvre to be able to formulate monetary policy based on macroeconomic knowledge and reasoning. On the other, it must bound by a mandate establishing the ultimate goals of monetary policy, which cannot be set but politically due to their inherently normative nature.

It is the violation of either of these boundaries between technocracy and politics that politicizes the ECB. At one end of the spectrum, this violation causes the ECB to make decisions that are no longer guided by expertise but by the desire or necessity to please some of its principals. At the opposite end, it makes the Bank start serving political ends other than the ones defined by its mandate. In both scenarios, the Bank ceases to act technocratically to turn, de facto, into a partisan political actor—whether doing someone else’s bidding or pursuing its own views of the “good society”.

To be sure, interpreting ECB politicization as proposed here poses its own challenges, above all the difficulty to gauge central bankers’ decision-making preferences with precision. The good news is that recent scholarship on (European) central banking has made several advances in this direction. Three methodological avenues, in particular, have already produced results that are directly relevant to the notion of preference-based politicization. The first, and more traditional, relies on elite interview and surveys of central bankers. The second looks at the latter’s professional and intellectual networks. The third, finally, measures preferences by examining the public language of the ECB. Taken together, these three approaches can be viewed as the nucleus of a promising research program on which to expand in the future, so as to study the issue of ECB politicization with the depth and clarity this topic deserves.

This blog post draws on the JCMS article, ‘The Politicization of the European Central Bank: What Is It, and How to Study It?’

Dr. Pier Domenico Tortola (@pierotortola)