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There’s a reason coins have resembled rulers for millennia: controlling the availability of legal tender is a pouvoir regalia — a power at the core of state-making and geopolitical influence. These days, however, the mint’s power is largely hoarded by independent technocratic central banks with narrow, often legalistic mandates – and even narrower mindsets.
As the EU enters a new geopolitical age, it should consider how the European Central Bank should support its strategic position. On Thursday, ECB President Christine Lagarde implicitly sent the money: “Everyone has to do their job . . . the central bank cannot be a jack of all trades. We have to do our job, which is . . . price stability.”
It really is. But from the point of view of the state, it is too narrow to see inflation control as central bankers only Job. This is especially true for the ECB, whose legal basis expressly gives it two mandates. Firstly, price stability, and secondly – as long as it does not undermine the first – support for the EU’s general economic policy.
Far too little attention is paid to the ECB’s secondary mandate and – even in other jurisdictions – how central banks’ many tools could be used in pursuit of broader policy goals. As European elected leaders agonize over how to mobilize the private investment that everyone agrees is needed in digital, green technology and defense-related manufacturing, it is irresponsible to maintain a taboo on the role of central banks in these agendas.
Central banks already pursue many goals beyond price stability. Most have a role in financial regulation. The ECB has a certain responsibility for the international role of the euro. And in its impressive work on a digital currency, it takes the geopolitical dimensions of money seriously – while rightfully waiting for elected politicians to make decisions that only they can make. It could advantageously impress the geopolitical stakes for them more strongly.
The economic theory underlying technocratic central bank independence does not generalize to other policy areas. We have delegated monetary policy to technocrats because of the futility of trying to inflict inflationary surprises on private economic actors. It does not follow that the central banks’ actions and political goals must be kept separate for all other issues as well.
What would it look like for the ECB to contribute more actively to the EU’s geopolitical priorities? These priorities recognize the need to shift more resources to capital investment in certain sectors – as set out, for example, in the widely supported Draghi report. The allocation of capital is something central banks cannot help but influence – but they generally pretend to take a neutral stance towards it.
An alternative would be targeted lending. Previously, the ECB’s “targeted long-term repo” facility offered banks funding below the normal policy rate to the extent that they increased corporate lending (it mimicked the Bank of England’s previous “funding for lending” policy). An updated version could offer similar incentives to banks that extend their lending to the sectors designated as strategic by the eurozone’s democratically elected leaders – be they decarbonisation, digital innovation or defense-related infrastructure – without picking individual winners.
Such a dual interest rate system – especially with a commitment to keep the target rate low – would shift capital flows towards the priority sectors chosen by governments. If such incentives made aggregate demand too inflationary, the key policy rate would be adjusted upwards accordingly. It would reduce activity in non-prioritized sectors – but that is the redistribution of resources that democratically stated priorities require.
Sanctions policy is another area in which central banks play a role. In the debate over whether to seize blocked Russian currency reserves to enforce Moscow’s compensation obligations towards Ukraine, the ECB has chosen to put up strong resistance. But its mandate is to support EU policy, not to shape it.
An example: Saudi Arabia and China have reportedly threatened to dump French government bonds if Paris supports seizing Moscow’s reserves. It is up to French and other EU leaders to choose how to respond. But the ECB has a “transmission protection instrument” dedicated to preventing sovereign funding crises in the euro area for non-economic reasons. It should publicly declare its readiness to use the TPI against any politically motivated attack on government bonds, increasing governments’ room for manoeuvre. In its supervisory capacity, it could also order the separation into separate vehicles of Moscow’s frozen reserves in Euroclear Bank and other eurozone banks.
All this would have to be democratically anchored. But the greater risk is to choose helplessness and completely ignore the geopolitical opportunities of the central banks.
martin.sandbu@ft.com
