Bank on Democracy

Sheri Berman and Kathleen R. McNamara

From Foreign Affairs, March/April 1999

Article preview: first 500 of 3,014 words total.

Summary:  As the world gets more democratic, central banks get more undemocratic. These powerful institutions should not be exempt from popular control.

Sheri Berman is an Assistant Professor of Politics at Princeton University and the author of The Social Democratic Moment: Ideas and Politics in the Making of Interwar Europe. Kathleen R. McNamara is an Assistant Professor of Politics and International Affairs at Princeton University and the author of The Currency of Ideas: Monetary Politics in the European Union.

In January, a new leading actor strode onto the world stage. More powerful than most national governments and responsible for helping to set the economic and political course for 280 million people and almost a quarter of the global economy, the European Central Bank (ECB) is notable for something more sinister as well -- its almost complete freedom from democratic oversight and control.

The ECB represents the culmination of two trends: European integration and central-bank independence. But while the potential drawbacks of the first trend have been analyzed endlessly, those of the second have gone almost entirely unremarked. Leaving central banks undisturbed by their host governments has become an integral part of the neoliberal catechism. In fact, however, the case for removing such powerful institutions from democratic oversight is unproven. Allowing it to rest unchallenged both damages democracy and begs important questions about who the winners and losers of economic policy should be.

The ECB will be responsible for setting interest rates and managing Europe's new currency, the euro. The bank's decisions will affect economic development across an entire continent and help determine whether European integration succeeds. Yet the officials who make these decisions will not have to answer to the publics whose jobs and quality of life hang in the balance. The bankers will not even have to give Europeans much basic information on how and why bank decisions are made. To make matters worse, the bankers' priorities are essentially set in stone; the Maastricht Treaty itself gives the ECB the narrow mandate of keeping prices stable.

All this runs counter to a recent and much-vaunted global trend: the transfer of power from authoritarian elites to democratic publics. Few have protested this inconsistency, however. In a perverse twist, the insulation of central banks from popular control has become one of the chief contemporary signifiers of liberalism. In a secular version of Lent that is now the rage from Europe to Latin America to the post-Soviet bloc, democratic governments are proving their faith and virtue by giving up something dear -- the ability to control their countries' economic destinies.

Exemplifying this trend, more countries increased the independence of their central banks during the 1990s than during any other decade since World War II. The wave swept five continents, engulfing countries as diverse as Albania and Sweden, Kazakhstan and New Zealand. Crucial support has come from an ideological consensus among the world's business and economic elites. The Financial Times, for example, has argued that the arguments "for central bank independence appear overwhelming," while The Economist has declared that "The intellectual case for independent central banks [has been] more or less won." Yet the arguments used to justify removing monetary policy from democratic control do not survive close scrutiny.

NO FREE LUNCH

Advocates of central-bank independence defend it in two related ways. The first is theoretical and justifies treating monetary policy differently from other kinds of policy because of its supposed special characteristics. The second is practical and justifies treating monetary ...

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