The Sovereign Crisis, Its Aftermath, and How Monetary Policy Has Changed
With the 2010 sovereign debt crisis, the Economic and Monetary Union (EMU) entered a critical phase, having to address questions of an existential nature for the first time, including the risk of default of one or more of its member states. In light of a
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The Sovereign Crisis, Its Aftermath, and How Monetary Policy Has Changed
2.1 Introduction When asked about populism, former president Mario Draghi used to answer: “[w]hat we know is we have an objective which is price stability and we have instruments to achieve that. How can we best contribute to confidence and stability? Through fulfilling that mandate” (interview for El Pais, November 2016). Draghi argued that discipline in monetary policy is the best strategy against populism and that 2% inflation is necessary for a stable currency. However, the insidious side of inflation is that typically strong economic growth, low unemployment, and rising wages are welcomed by voters and their elected leaders.1 Moreover, since the sovereign debt crisis in 2010, the euro area has entered a severe phase, which has confronted the ECB with challenges beyond achieving and maintaining price stability. For the first time, the ECB had to resolve questions of an existential nature, including the risk of default of one of its member states. Likewise, the crisis management role of the ECB has also been under attack due to the rise of anti-establishment parties and their criticism of the pursuit of the price stability-oriented monetary policy, challenging the consensus that surrounded the granting of the central bank’s 1 For a central bank it would in fact become more difficult if populism managed to erode the bank’s ability to defy inflation through political pressure. While the relationship between inflation and central bank independence was positive in the 1980s, as shown by Balls et al. (2016), this relationship has weakened over the pre-crisis period, 2000–2008.
© The Author(s) 2020 C. Macchiarelli et al., The European Central Bank between the Financial Crisis and Populisms, https://doi.org/10.1007/978-3-030-44348-1_2
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independence (see Chap. 1). Several of these criticisms took on a Eurosceptic rhetoric (see also The Economist 2019). Criticism of independent central banking is not merely a European phenomenon. In the US, it has been reignited with the election of Donald Trump as President. During his campaign, he criticised the former Federal Reserve chair Janet Yellen, claiming that she should be “ashamed of herself” (The Economist 2017) for keeping rates too low, and then later his own appointee, Jerome Powell, for keeping rates too high. Critiques were also raised in the UK. After the Brexit referendum, former Prime Minister Theresa May criticised the Bank of England (BoE)’s policies for the “bad side-effects” caused to savers by the BoE’s near-zero rates and asked for a change in monetary policy. In other EU member states, parties that were critical of the ECB—some of which can be classified as right-wing populist—achieved considerable election successes. Marine Le Pen’s far-right Front National in France (which obtained almost 11 million votes in the presidential elections on 7 May 2017) promised more decision-making by French people and less by global financial forces and multilateral
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