Masters of the ‘masters of the universe’? Monetary, fiscal and financial dominance in the Eurozone

Abstract

The rise of central bankers to the status of new ‘masters of the universe’ has been matched by mounting allegations of political overreach. In the Eurozone, for instance, the European Central Bank has increasingly been accused of straying into the fiscal realm. Why do politically independent central banks engage intensely and publicly with government policies, thereby threatening the neat separation between monetary and fiscal policy that was meant to protect central banks themselves from interference? While existing political economy accounts have focused squarely on the issues of government debt and central bankers’ fears of fiscal dominance, we argue for the emerging role of ‘financial dominance’ throughout the crisis, thereby shedding light on the structural forces that master the new masters of the universe. To this end, we pursue a mixed-methods approach, combining quantitative text analysis techniques with a qualitative understanding of the context in which central banks communicate on fiscal policy.

Let's speak more? How the ECB responds to public contestation

“…For instance, in a notable shift for an institution that has been traditionally wary of disclosing too much information to the public (see Issing, 1999), the ECB moved in this direction by starting publishing accounts of its internal deliberations in January 2015. The ECB also started the practice of appearing before a number of national parliaments (Tesche, 2018), increased the frequency of communication with the European Parliament (Fraccaroli, Giovannini, & Jamet, 2018), engaged with debates on fiscal policy and structural adjustment (Ban & Patenaude, 2018;Diessner & Lisi, 2019); and even toured Europe in order 'to engage, explain and listen' to European public 2 A straightforward explanation for the changes to the ECB traditionally guarded communication strategy lies in the (de facto and de jure) transformations in the ECB role throughout the crisis. As the ECB took on an increased political leadership by adopting unconventional policies and taking on new legal responsibilities in the realm of financial stability, its rhetoric expanded accordingly (Diessner & Lisi, 2019;Ferrara, 2019;Tortola & Pansardi, 2019).…”

Does politics drive conflict in central banks’ committees? Lifting the veil on the European Central Bank consensus

“…For instance, labor market-related issues regularly appear in central bankers’ communication because unemployment impacts the inflation level according to the traditional logic of the Phillips curve. Likewise, fiscal policy arises in the discussion of monetary policymakers because government spending strategies affect the level of overall demand in the economy (see Diessner and Lisi, 2019).…”

Between governability and legitimacy: The ECB and structural reforms

“…Although he explicitly acknowledged that, with monetary policy at the zero lower bound, Vesan et al, 2021. Diessner andLisi, 2020 find that the ECB also reduced its communication on fiscal policy. 125 Crespy and Vanheuverzwijn, 2019;Hemerijck, 2017. structural reforms had contractionary effects in the short term, Draghi rejected "the conclusion that this means all structural reforms should be postponed."…”