Central banker: extinction of the species
“Of course our central bank is independent”, the Turkish President, Recep Tayyip Erdogan, pretty much just declared, just before dismissing by presidential decree (on 7th July) the boss of Turkey’s central bank, Murat Cetinkaya, stating that “a central bank cannot ignore the signals sent by the President”. It was in the last century and in another era – 22 years ago in fact – that Gordon Brown, Britain’s Chancellor of the Exchequer, made the surprise decision to grant the Bank of England total freedom to define the country’s monetary policy. The setting of interest rates and inflation objectives is in fact something all too serious to leave to politicians who have so far made a habit of manipulating these instruments for the purpose of gaining election. Because it is obviously not just in Turkey and hybrid democracies that ally democracy and individual power, even dictatorship, where the executive branch is meddling with monetary policy.
After having fought tirelessly against Obama who was accused of maintaining artificially-low US rates, his successor Donald Trump has repeatedly intervened and stigmatised his own central bank and its President, Jerome Powell, accused of stifling the economy due to the progressive raising of US rates. Powell must therefore suffer the heavy fire – and trigger-happy tweets – of a US President who is trampling all over the feet of the prestigious Federal Reserve’s independence. All central bankers are, alas, not called Mario Draghi who stood strong, for years, against the unhinged and vindictive Germans and Dutch railing against his courageous and effective policy that undeniably saved the euro. Because it is not this policy that will succeed him in this role, taking the risk least likely to tarnish his widespread, sparkling image.
As the Financial Times wrote a few days ago, the “whatever it takes” attitude (of Draghi) that calmed the European tempest will become, with Christine Lagarde, simply “whatever”. Having never taken any position in the economic debates that divided the North and South of Europe during the continent’s sovereign debt crisis, and having clearly shown no tendency toward the monetary policy decisions adopted by the central bank under Trichet then Draghi, Christine Lagarde is nevertheless an excellent choice…if the desire of Europe’s leaders is indeed to transform the ECB into a deliberative assembly, indeed a recording chamber for their decisions, and into a soundboard for their concerns. Lagarde’s nomination is therefore a purely and eminently political decision made by the French and German governments that are worried about bringing the central bank back into the fold. It is also a signal that will be interpreted unequivocally by the markets, because the ECB will lose – proportionate to the amount of press conferences and action (or inaction) Lagarde does – this precious credibility that remains an essential ingredient.
By choosing a rock star figure to head one of the most powerful central banks on the planet, Europe’s leaders have thereby decreed that they don’t need a central banker to run a central bank. Our world has thus barely evolved since Karl Polanyi (1886-1964) who described the unassailable political colouring of the job of a central banker.