by Vadym Syrota*

Nowadays global economy faces a slightly controversial type of crisis: despite looming economic recession, states, business and households find themselves in the environment of, what The Economist called, “free money”. Central banks are to be credited for the establishing such strange new economic order due to their anti-crisis toolkit applied in the past. So, the independence of central banks looks like an obsolete concept in these circumstances. Given the downward trend of globalization, the idea of central bank independence will be exposed to radical transformation within the revamped underlying economic theory free from an excessive neoliberal background.
Globalization under the umbrella of neoliberal ideology has been the key feature of the development of the economy worldwide in 1990-2000s. Free movement of goods, services, capital and labour served as a dominant idea underpinning this kind of economic integration. According to the supporters of the mentioned dogma, this type of economic relationships, which stems from the Comparative Cost Advantage Theory proposed by David Ricardo, is the best possible option to benefit all sides involved in such cooperation in the area of production and free-trade. Therefore the role of state intervention, through applying a regulatory toolkit, was set to be minimal within then dominant economic ideology.
Central bank was to be a reliable watchdog to guarantee the free movement of capital that is the cornerstone of globalization. Thus,  as Adam Tooze phrased in: ”if the freedom of capital movement was the belt, then central bank independence was the buckle on the free-market Washington Consensus of the 1990s”. By such independence it was meant that monetary technocrats were able to withstand the pressure of politics and organized labour to meet their demands. This concept favoured technocratic calculation, institutional independence, and nondiscretionary rules aimed to establish low-inflation macroeconomic environment. In public opinion, the stagflation of 1970s, which marked the crisis of Keynesian theory (which is experiencing a sort of renaissance today), is credited for arising the monetarists system of believes. The latter further transformed into the independence of central bank concept. Surprisingly, a group of thinkers from the ashes of the Habsburg Empire are believed to contribute significantly to the establishment of the mentioned idea even earlier. According to Quinn Slobodian, the concept of independent central bank is rested on the neoliberal “encasement” of market forces from the pressures of democracy through transnational governance. Such “social pressure” includes increasing public needs that are to be funded through the money printing of monetary authorities (mostly, indirect). Thus, the lender of the last resort should “be encased” into the institutional framework allowing it to withstand public and state intervention effectively (as well as, “independent” from national government).
The existing of the described ideological orientations may partially explain why Margaret Thatcher, the “Political Godmother” of Western neoliberal and conservative transformation, opposed central bank independence mistrusting the ability of such institution to steer effectively the economy via interest rate setting up (the main toolkit within this theoretical approach). Nevertheless, she did not manage to block the diffusion of the doctrine into political and financial discourse across the globe. So, the community of central bankers lived through the “Golden days” in the 1990-2000s, while enjoying the perks of the status of unelected “Lords of finance”.
“This music will sound forever” is the most suitable term to portray the type of complacency amongst the political and financial elite during the above-mentioned Great Moderation period of comprehensive prosperity in the economy worldwide. Unfortunately, even the high-flying gurus of central banking found themselves helpless against the backdrop of the Great Financial Crisis 2007-8. Moreover, the massive anti-crisis measures, including different sorts of central banks’ “quantitative easing” (QE) programs, resulted in the “New Normal”. The latter definition was used to describe the persistently lower short-term output growth in line with immensely low inflation in the leading economies. This situation is completely contrary to the case of 1970s stagnation that caused further “monetarists transition”.  Moreover, such macroeconomic situation ideally aligns with the fade of globalization. 
The nature of such economic process was revealed by Adjiedj Bakas that coined the term “slowbalization” to depict the slowing pace of economic integration around the world in 2008-2018. To illustrate such trend: long-term foreign direct investments by firms has tumbled from 3,5 % of world GDP to 1,3 % percent in 2018. Another striking example is the fact that cross-border bank loans have collapsed from 60% of GDP in 2006 to about 36% in 2018. Given the tariff wars and shift in the functioning of supply chains worldwide, it would be useful to foresee the possible trend of globalization if the described situation were not become reality. A phase of saturation was supposed to appear in such case due to the possible situation, when the pull of labour and multinational investment in physical assets have become less important. Moreover, financialization of the economy at the cost of production would only have restored its positions: financial flows such as bank loans had picked up as the shock of financial crisis receded and Asian financial institutions gained more reach abroad.
Thus, the existential crisis of dominant economic model of globalization rested on the neoliberal paradigm could have lost its momentum because of objective drawbacks and vulnerabilities of the mentioned economic theory. Even before the СOVID-19 crisis became obvious, the former Governor of the Bank of England Mark Carney acknowledged that two items hold a special place among the main “lies of finance”: “Markets always clear” and “Markets are moral”. Given the failure of economical theoretical framework, the concept of the independence of central bank needs critical reassessment from the perspective of its adequacy to the current period of modern economy and finance development.
A decade of below-target inflation prompted the well-known across the globe gurus of finance and banking to admit that the current mandate of a central bank under the umbrella of “institutional independence” needs radical transformation. According to Larry Summers and Anna Stansbury: “Central banks cannot always set inflation rates through monetary policy“. It is worth considering that COVID-19 crisis has only exacerbated the described trend. Markets suddenly found themselves functioning in the “free money” environment. This term was proposed by The Economist to depict the situation in which a large-scale government borrowing and central banks’ monetary injections, against the background of COVID-19 crisis, caused a huge amount of financial resources circulating around the world at an interest rate of near-zero or negative level. In such macroeconomic environment deficits and money-printing may well become the standard tools of policymaking for decades.
Nevertheless “free money” world order poses a significant threat to the classic imagination about central bank independence. First of all, the mammoth volume of today’s government borrowing is favoured by low interest rates. The IMF predicts that rich countries will borrow 17 % of their combined GDP this year. Thus, the pressure on the setters of interest rates (central banks) sharply rises affecting the technocratic nature of decision-making process at the monetary authorities. The temptation of top-officials to cut the cost of sovereign borrowing by leaving minimal interest rates as long as possible is strong nowadays. Given this fact, the leading central banks may be compared with servants working as the government’s debt-management arms. Secondly, the upward trend of money printing by monetary regulators, in order to fund government borrowing, also undermines their independence. In the USA, Great Britain, the Eurozone and Japan central banks have created new reserves of money worth about $3.7 trn. in 2020. Thus, it would be quite logical to support the experts of the Bank for International Settlements, who proclaimed that “the fine line between monetary policy and government debt management has become blurred”.
In the light of the failure of existing neoliberal economic order, the current concept of the independence of central banks is obsolete and inadequate to the modern world’s realities. It may be predicted a significant shift in dominant political economy doctrine towards expanding the level of state intervention in the economy and financial markets, stimulating the aggregate demand at the economy, and the transformation of redistributive mechanism to fight social inequality. All the above notions will affect the tasks of a central bank prompting to broaden its mandate. For example, safeguarding the stability of a banking system may become the cornerstone task of monetary authorities, while some sub-tasks may become of significant importance within central bank’s framework (including the avoidance of market bubbles arising, overcoming technological challenges, etc.). To weather successfully the looming economic disaster, the newly-established concept of modern central bank and promotion the economic leadership under its umbrella are crucially needed. Those countries that are able to tackle this challenge will be subsequently granted the title of Post-Covid-19 economic recovery champion.
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* Vadym Syrota (PhD) is an independent banking expert and former official of the National Bank of Ukraine (central bank) at banking supervision and financial stability departments. He is a regular contributor to the Kennan Institute blog (Woodrow Wilson Center, USA) and numerous Ukrainian business and economic media outlets.
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For critical accounts of the ‘Central Bank Independence’ concept see:
— Adolph, Christopher. 2013. Bankers, Bureaucrats, and Central Bank Politics: The Myth of Neutrality. Cambridge University Press.
— Epstein, Gerald. 2019. The Political Economy of Central Banking: Contested Control and the Power of Finance. Edward Elgar.
— Hancké, Bob. 2013. Unions, Central Banks, and EMU: Labour Market Institutions and Monetary Integration in Europe. Oxford University Press.
— Maman, Daniel and Zeev Rosenhek. 2011. The Israeli Central Bank: Political Economy, Global Logics and Local Actors. Routledge.
— Tognato, Carlo. 2012. Central Bank Independence: Cultural Codes and Symbolic Performance. Palgrave.

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