The Lawlessness of the European Central Bank

Zoe Chace has an informative but tonally off piece about how the European Central Bank has decided to stop doing its job and start making decisions outside the scope of its formal authority instead.

The way this works is pretty simple. Central banks are supposed to stabilize demand. Stabilizing demand properly is crucially important to short-term economic growth. But in the long-term, other things matter much more than demand stabilization. Smart politicians don’t want to have their country’s short-term growth prospects crushed by inappropriate monetary policy. And smart economists know that long-term growth is the most important thing of all. So since central banks are staffed by smart economists, it’s tempting to do what the European Central Bank is doing and simply forget about stabilizing aggregate demand correctly and instead use monetary policy as a weapon.

As Chace puts it:

Thanks to its unusual powers, the ECB has succeeded in forcing European governments to do things they otherwise might not have.

There are many problems with this approach, starting with the fact that it’s illegal. For one thing, it completely blurs the lines of democratic accountability and will ultimately undermine the wellsprings of good governance. This is important, because even though the European Central Bank staff certainly seems to think it knows what the secrets are to long-term growth, the fact of the matter is that this is very controversial. We’re used to hearing people of a “progressive” bent talking about stimulus while more conservative types talk about structural reform, but two can play at this game. Take Jeffrey Sachs, for example, who’s basically doing the same thing from the left and insisting that it would somehow be wrong to solve America’s demand shortfall unless we first embrace an ambitious eco-egalitarian economic reform agenda.

These are important questions; they’re questions that national legislatures have to sort out. Central bankers have to stick to a relatively narrow set of goals and be held accountable when they fail to meet those goals.