Cicero Policy Briefer

Issue 16, September 2007

Can the European Central Bank keep its independence?

By Michael Cooper

As Portugal gets its teeth back into its Presidency of the European Union after the summer break, it has the unenviable task of brokering an agreement on the draft European Treaty. Submitted at the end of July, it will be informally discussed for the first time this weekend by EU foreign ministers. Political battling between Member States aside, the Reform Treaty has caused most headaches for the European Central Bank (ECB)—not on account of the many similarities it shares with the failed original draft Constitution, but because of a small but significant omission.

In the original Constitution the ECB was granted a specific clause that placed it outside of the rules that all other European Institutions would be subject to, meaning that the ECB would be assured independence from political influence. This clause has not been duplicated in the new Reform Treaty, meaning that the Bank faces the possibility of political interference in its day-to-day operation as well as its long-term objectives. The Bank has responded to the situation by sending a letter to the Portuguese presidency explaining the significant implications that political meddling in its affairs can have, and is now keeping a keen eye on developments in discussions until the Treaty is officially signed in December.

The issue of the ECB’s political independence has been on the political radar in Brussels ever since the now French President Nicolas Sarkozy began his election campaign. Unhappy with the strength of the euro and pushing for more influence over EU monetary policy, Sarkozy has further intensified his attacks on the Bank following a turbulent summer in Frankfurt. He argues that Europe should not “deprive itself of the weapon of interest rates”, and has also called for better monitoring of the transparency of the markets’ operations and how effectively they finance the world economy. The latter sentiment is likely to lead to increased calls for transparency in hedge fund markets—an area in which France is likely to find support from Germany.

Despite the fact that some consequences of Sarkozy’s pressures could fall on the hedge fund market, the Bank is more than aware of the political tensions surrounding its independence. For the time being, with political dividing lines firmly established on the issue, the ECB can take heart in its response to the financial crisis of the summer. It received plaudits for the scale and speed of its reaction to the credit-market crisis, as well as for openness about its activities and its communications with money markets and banks. Such practice could prove to be far more effective for the ECB against the onslaught of Sarkonomics than any political bargaining.

Michael Cooper can be contacted on +44 (0)20 7665 9530 or click here to email.

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