Central Bank Independence and the Future of the Euro (Comparative Political Economy)

Over the past decade central banks have taken on new and expanded roles in an attempt to manage the global financial crisis. The European Central Bank (ECB) has been no exception. If anything, because of the incomplete architecture of the euro, the ECB has faced more serious challenges than either the Bank of England or the Federal Reserve. With the onset of the euro crisis, the ECB was forced to take on powers that went well beyond the conventions of standard monetary policy to prevent European Monetary Union from unravelling. Panicos Demetriades, former Governor of the Central Bank of Cyprus during the country's bailout in 2013, examines the role of the ECB and its adoption of these new powers, which have led to legal and political challenges, high level resignations and the controversial removal of central bankers from their posts without due process. Demetriades argues that at a time when stability and action are needed to secure the future of the euro, the very foundations of the Euro-system are being eroded, namely its ability to act independently. The book provides a lively and insightful account of the processes that can make or break the euro--Publisher's description Cover Half-title Series information Title page Copyright information Dedication Table of contents Preface Acknowledgements Foreword 1 Central bank roles: historical context From financing wars to inflation targeting: a brief history of central banks Central banks and the global financial crisis Under threat: central bank independence 2 Central bank independence in Europe: origins, scope and limits Central bank independence and price stability The origins of CBI and EMU Dynamic inconsistency Political business cycles Empirical evidence Goal versus instrument independence Fiscal dominance versus monetary dominance Financial and personal independence Scope of central bank independence Limits of CBI in the euro area Concluding remarks 3 Crisis management and legitimacy Central banks as firefighters Politicization of central banks The European dimension: the role of the ECB in the troika Concluding remarks 4 The European Central Bank’s policies during the crisis Monetary policy during normal times Phase I: the credit crunch Phase II: the sovereign debt crisis Phase III: deflation risk Legal and political challenges Concluding remarks 5 Whatever it takes The euro in troubled waters The Outright Monetary Transactions programme OMTs: conditionality and technical features Concluding remarks 6 Banking union Origins and overview The single rulebook and the Basel Accord Single supervisory mechanism Single resolution mechanism European deposit insurance scheme Weaknesses, gaps and challenges for central bank independence Concluding remarks 7 Small countries and why they matter Why small countries are systemic The true causes of the Cyprus banking crisis The unintended consequences of the bail-in The erosion of the central bank’s independence Concluding remarks 8 Political money-laundering A new form of illicit finance From illicit financial flows to the financing of terrorism and subversion Money-laundering: how it’s done and how it can be deterred Euro area weaknesses Concluding remarks and a new proposal 9 Can the erosion of central bank independence be reversed? The unintended consequences of “whatever it takes” The way forward: six policy recommendations References Index

Over the past decade central banks have taken on new and expanded roles in an attempt to manage the global financial crisis. The European Central Bank (ECB) has been no exception. If anything, because of the incomplete architecture of the euro, the ECB has faced more serious challenges than either the Bank of England or the Federal Reserve. With the onset of the euro crisis, the ECB was forced to take on powers that went well beyond the conventions of standard monetary policy to prevent European Monetary Union from unravelling.

Panicos Demetriades, former Governor of the Central Bank of Cyprus during the country's bailout in 2013, examines the role of the ECB and its adoption of these new powers, which have led to legal and political challenges, high level resignations and the controversial removal of central bankers from their posts without due process. Demetriades argues that at a time when stability and action are needed to secure the future of the euro, the very foundations of the Euro-system are being eroded, namely its ability to act independently. The book provides a lively and insightful account of the processes that can make or break the euro.

The former Governor of the Central Bank of Cyprus examines the role of the European Central Bank in the euro crisis and what role it should play in the future.