Strapped to the mast
EU central bankers between global financial markets and regional integration
Kenneth Dyson,Kevin FeatherstoneandGeorge Michalopoulos
Since the early 1980s, national central banks in Europe have been operating within a dramatically changing environment. First, there has been a process of globalization of financial markets. Financial innovation and liberalization of capital movements, especially under the auspices of the Single European Act, have led to the internationalization of financial markets, thereby altering the systemic relationships that govern monetary policy-making. Foreign exchange market turbulence in the 1980s and early 1990s clearly demonstrates the enhanced power of major financial market actors, illuminates the more powerful constraints on state economic policies and suggests evidence of a crisis of effectiveness of traditional monetary and exchange rate policy instruments. Second, within Europe, the relaunch of Economic and Monetary Union (EMU) in the late 1980s represented a major political challenge to the power of national central banks. It added a second source of uncertainty and potential instability to their operating environment.
In this context of dual assaults from global market contingencies and regional political pressures, central bankers have sought to ‘strap themselves to the mast’, in the manner of Odysseus, by adhering to a professional ideology of central bank independence. That ideology rested on a professional dedication to the value of price stability, and to the belief that commitment to price stability could only be made credible if central banks were made independent in their use of monetary policy instruments.
This chapter analyses the impact of the European Union (EU) central banking community in the regional process of Economic and Monetary Union negotiations through the signing of the Maastricht Treaty. It highlights the ability of central banks to secure their corporate interests through their participation in the making of EMU. The design of the final stage of EMU was almost exclusively negotiated within the world of central banks. Price stability has become the primary target of EMU, while political and economic independence of the ‘new’ EU monetary institutions, the European Central Bank (ECB) and the European System of Central Banks (ESCB), has been ensured. We argue that by promoting independence, central bankers were attempting to limit the loss of power they suffered because of globalized financial markets and the regional process of EMU.