TESTY exchanges between the European Central Bank and European officials on how to deal with the euro crisis have prompted consideration of whether -- and in what circumstances -- the policies and actions of an independent central bank can be properly called into question, and indeed whether the ECB is doing all that it can to ameliorate the crisis.
There is a long literature in economics that points to the value of an independent central bank. The core elements are legal, financial and operational independence and it is typical, for example, to have set terms for board appointments -- terms that can only be cut short for unethical behaviour. The obvious intention is to isolate the central bank from political interference that might seek some short-term gain at the expense of a longer-term loss in credibility and monetary stability.
The ECB is widely regarded as one of the most independent central banks in the world and the pronouncements of its Governing Council -- made up of six executive members and the governors of 17 central banks -- is seldom openly questioned. As a result, many in them have been very vocal in criticising recent proposals to resolve the euro crisis. In fact, any suggested debt restructuring is met with slammed doors and cries of "horror," "devastation" and "catastrophe" and there was even a threat to withdraw support from the Greek banking system.
These public comments and threats only serve to undermine public and market hopes of an eventual resolution of the crisis and further diminish the chances that the three programme countries will ever recover. Moreover, they run the risk of prompting a run on Greek banks that would put the whole euro project in danger. So they must be questioned.
ECB sources further suggested this week that it would resist any pressure on an Italian member of the executive board -- Lorenzo Bini-Smaghi -- to resign in the event that another Italian becomes the new head of the ECB. This might derail the appointment of the new chief altogether because it would leave two Italians on the board. The objection would be lifted, however, if Mr Bini-Smaghi were made head of the Bank of Italy.
This is a barely disguised attempt to blackmail the Italian government and is an affront to democracy. There is a limit to the autonomy of central bankers and it may have been reached.
But the more compelling reason to address the ECB is that this is a once-in-a-lifetime crisis that has undermined the ability of the bank to carry out its functions and it cannot solve the problem on its own. Governments are being asked to make large sacrifices. Independence concerns the day-to-day activities of a central bank and does not have the same weight in a crisis. Moreover, any suspension of independence in these circumstances would not form a precedent for future interference.
The task of the euro system is to maintain price stability while, at the same time, safeguarding financial stability and promoting financial integration. The goal of price stability is primary and there is genuine concern over financial stability, but the pursuit of financial integration has been completely sacrificed to the crisis. Such integration would permit equal access to markets on similar terms to all participants but, as we know, three countries and many banks are shut out of the markets while others struggle at higher interest rates. And delays in a return to market access could undermine recovery programmes.
The ECB is not solely responsible for this but its reaction has been to deny any responsibility whatever. Its annual report on financial integration describes a "rollback in financial integration" on virtually all fronts. But rather than recognise this as a problem, its reaction is to downplay its significance. Compared with its 2008 report, financial integration is demoted from "key importance" in the transmission of monetary policy to a role in "fostering" its conduct -- and integration is now "relevant" rather than "fundamental." Why not just admit that the ECB is not able to do its job properly under current circumstances?
And because financial integration is blamed by many for the low interest rates that caused the booms on the periphery, Mr Bini-Smaghi argued last week that there could have been even lower interest rates without monetary union.
This is just one in a series of speeches devoted to absolving the ECB of any blame in the current crisis. Ultimately, they just undermine its credibility.
The ECB needs to be shocked into conceding that there are serious problems with monetary union that should be urgently addressed in a co-operative manner.
Gary O'Callaghan is Professor of Economics at Dubrovnik International University. He was a member of the staff of the IMF and has advised numerous governments on macroeconomic policies.