Originally published in The Financial Times

June 30,2011

The Latest Challenge to ECB Independence


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The pressure on Lorenzo Bini-Smaghi to resign from the executive board of the European Central Bank is a fundamental challenge to the independence of the ECB and to its ability to represent European interests rather than those of individual countries.

When the ECB was being created, European politicians said that it would be a truly European institution, making decisions for the benefit of the Eurozone as a whole. Members of the ECB's governing boards would be expected to act as Europeans rather than as representatives of their individual national governments.

To reinforce this independence, the Maastricht treaty states that officials of the ECB would not serve at the pleasure of their governments but would have appointments for a fixed term of eight years. To reinforce this independence, the votes at the ECB are not disclosed, allowing individuals to take votes that favor the overall Eurozone economy even when that is contrary to the interest of the member's own country.

Like other Eurozone myths, the goal of ECB independence that rests on the principle of fixed term appointments has now been destroyed. The French government has apparently succeeded in forcing Dr. Bini-Smaghi to resign in order to make way for a French appointment to the ECB executive committee.

French President Nicolas Sarkozy has announced that Dr. Bini-Smaghi will "voluntarily" resign before the end of the year. The French argue that it is wrong for Italy to have two members of the Executive Board while France has none. So much for the idea of Eurozone solidarity.

President Sarkozy made France's support for the appointment of Dr Mario Draghi, another Italian, as the next head of the ECB conditional on being able to replace Dr. Bini-Smaghi with a Frenchman. As someone who thinks Mario Draghi is the best candidate for that job, I find this action fundamentally undermines the ECB as an institution.

But national pressure trumps the Maastricht rules. The Italian government will offer Dr. Bini-Smaghi a suitable alternative job that will allow him to move on from the ECB with dignity. But the ECB will be the worse for it.

The writer is professor of economics at Harvard University and former chairman of the Council of Economic Advisers and President Ronald Reagan's chief economic adviser.