Who wants a central bank job?

The British government recently advertised for the position of governor of Bank of England whose term gets over in January 2020. Likewise, the European Central Bank president’s term is finishing in October 2019. This has led to media speculation over probable candidates for the two coveted jobs. But hang on, are they really coveted? Those interested in the two positions should be mindful of what has been going on with central bankers worldwide. 

Take the case of Jeremy Powell. He was appointed by US President Trump only to be openly criticised later by Trump himself. As part of Federal Reserve’s oral history project, one of the questions posed to Alan Greenspan was whether the Federal Reserve could say no to the executive. He replied, “It wasn’t always a show of confidence. It just was a fact that, if I stood my ground, they could do nothing.” Powell has also stood his ground so far but the question is for how long. Even Carney has been criticised for his remarks over Brexit. 

Historically, the source of contention between government and central banks has been interest rates. The governments tried to pressurise the central bank to lower interest rates and one tried to manage the tensions. Lately, the contention has encompassed banking regulation and what is more worrisome is unwillingness of governments to manage the tensions but use tactics to undermine central banks. 

The most intriguing experience was in Cyprus, where Panicos Demetriades was appointed in May 2012 for a five-year term but resigned two years later in April 2014. Demetriades wrote an account of his experiences in A Diary of the Euro Crisis in Cyprus, which is a must-read. Before 2008, Cypriot banks had expanded aggressively becoming 10 times of country’s GDP. The banks had invested heavily in Greek government bonds and lent aggressively towards real estate sector, something which was seen across banks in Iceland, Ireland, and US which also faced crises. 

Demetriades knew he was sitting on a time bomb and tried to negotiate a solution with the troika of IMF, ECB and European Commission but could not succeed. The politicians continued to underestimate the scale of problem and banks remained highly undercapitalised. 

As the banking problem worsened, who better than a central banker to be made the scapegoat. The media anyway disliked Demetriades as he was seen as an outsider. The politicians wanted Demetriades to be ousted but under the Eurosystem the central bank governor could not be fired. 

The government did two major things (apart from humiliation) in mid-2013 which pushed Demetriades towards his resignation – firing the deputy governor who backed the governor and pushing the governance powers from governor to the central bank board. Under the new legislation, the government expanded the central bank board membership from five to seven with the two new members becoming executive directors. The ECB protested against this legislation but to no avail. The personal attacks mounted even bringing his family into the picture. In March 2014, he submitted his resignation citing “personal reasons” and difficulties working with the board as the reason for resignation. 

Cyprus is not the lone case. In 2017, central bank of Ukraine governor Valeria Gontareva resigned under similar circumstances. She was appointed in 2014 for a seven-year term but resigned after receiving death threats from lawmakers and businesspersons over her tough anti-crisis measures. In 2018, Latvian Ilmars Rimsevics was arrested and his house raided over a bribery case only to be reinstated in March 2019. He has been governor since 2001 and is currently serving his third six-year term.

It is also interesting to note the striking resemblance of events in Cyprus with those in India (2017-18). There was discontent between the government and the RBI governor for rising NPAs, low credit growth and the central bank’s high reserves. There were reports on how the powers of governing RBI were shifted from the governor to the RBI board and these battles affecting the governor’s health. In the end, the governor resigned after just two years mentioning personal reasons, like just like his Cypriot counterpart.

Compared to above, there have been some lighter frictions. Italy politicians were eyeing its central bank’s gold, South African central bank is under attack for not being a nationalised bank and Austria central bank’s banking supervision powers are being transferred to financial watchdog FMA.

All these events show that central bank independence may be an important economic idea, but its spirit lies with the government. Paul Tucker, former deputy governor of Bank of England, in his much acclaimed book termed central bankers as unelected powers. Yet, the authority of central bankers is being compromised in interesting ways across the world by elected powers. With rising protectionism and nationalism, the governments are all out to show their supremacy. Those seeking these jobs should be doubly careful as prestige could quickly turn into nightmare. 

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The author is faculty at Ahmedabad University and runs Mostly Economics