M&G’s Woolnough: The challenges facing a changing ECB

Richard Woolnough 160 byline

The ECB is modelled on the idea of an independent central bank, where decisions are made to enforce economic rather than political discipline. Recently however, its role and mandate seem to be changing.

This move by the ECB to become more an arm of the state is typified by Mr Weidmann’s comments recently. He draws comparisons of the recent potential bond buying announcement, with that of aggressive state financing via the printing of money by non independent central banks.

Not only has the ECB agreed to become more like an arm of the state, it is potentially attempting to become the state. Its bond purchase programme is dependent on a sovereign state meeting certain conditions, which means it is now aiming to have the powers of a state, in terms of controlling net taxation and spending. It would therefore control the printing press and control expenditure. It would then automatically face the tricky political task of switching the printing press off if conditions are not met by its subjected member state. No wonder Mr Weidmann does not approve.

This is not the only way the central bank has become more political recently. By having the explicit aim of saving the euro at all costs it has basically made a political decision. Currency unions are by definition a political construct. Therefore, its recent move to a dual mandate of inflation targeting and saving the euro is a move towards a more politically focused ECB.

One of the problems the ECB faces as a political animal is its construction. It has not exactly been constructed in an efficient, democratic manner. Firstly, one country one vote means proportional representation is out the window, potentially annoying the larger members who do not agree with the policy and have to pick up the bill (Germany). Secondly, the appointment of its council members is undemocratic. Thirdly, council members, as national central bank governors, tend to be economists!

There is always a connection between a central bank and the state that it is theoretically acting in the independent interest of. The ECB is becoming more like the ECP (the European Centre for Politics). Will European governments give it this increasing power? Will it be able to exercise this power correctly?

By Richard Woolnough, M&G Investments