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Europe’s Central Banks Face Growing Political Pressure Over Fiscal Demands
Rising Fiscal Demands and Central Bank Independence
Mounting Government Pressures
FRANKFURT, July 6 (Reuters) – Central banks in Europe could come under growing pressure from governments facing rising demands for pension spending and industrial support, European Central Bank policymaker Fabio Panetta said on Monday.
Germany, France and Italy are all struggling to fund higher defence spending, reviving industry and sustaining welfare systems strained by ageing societies.
Concerns Over Fiscal Dominance
“My first reaction is thank God that we’ll retire soon because I think we will be more and more under fiscal dominance,” the Bank of Italy’s governor said, referring to a situation in which government needs dictate monetary policy.
“If the voters are moving in that direction, I would not expect that the central bank can stop the waves,” Panetta added after a presentation by Oxford University academic Beata Javorcik at an event in Rome.
The Role of Central Banks in Fiscal Policy
Central banks play a key role in determining governments’ borrowing costs, influencing short-term interest rates directly and bond yields through their market operations.
Panetta’s remarks come amid signs of growing tensions between heavily indebted governments and their central banks, endangering decades of independence.
International Perspectives
Japan’s Approach
In Japan, Sanae Takaichi’s government is trying to restore dovish policymakers to the Bank of Japan, in a shake-up aimed at slowing interest rate hikes.
U.S. Central Bank Independence
The U.S. Supreme Court refused to let Donald Trump fire a Federal Reserve governor last week but left the U.S. central bank isolated as the only agency shielded from presidential power.
Potential Political Roles for Central Bankers
ECB President Christine Lagarde did not rule out having a role in next year’s French presidential election, even if just to bring a European argument into national politics.
(Reporting by Francesco Canepa, Editing by William Maclean)