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There is a reason why coins have, for millennia, carried images of rulers: controlling the supply of legal tender is a royal power – a power at the center of statecraft and geopolitical influence. Today, however, the power of the Mint is largely monopolized by independent technocratic central banks with narrow, often legalistic, mandates and even narrower mindsets.
As the EU enters a new geopolitical era, it should consider how the European Central Bank should support its strategic posture. On Thursday, ECB President Christine Lagarde implicitly passed the buck: “Everyone has to do their job. . . The central bank cannot be a jack of all trades. We have to do our job, that is. . . price stability”.
In fact it is. But from the point of view of statecraft, it is too limited to consider the fight against inflation as a task of central banks. only job. This is especially true of the ECB, whose legal basis explicitly grants it two mandates. Firstly, price stability and secondly (as long as it does not undermine the first), support for the EU’s general economic policies.
Very little attention is paid to the secondary mandate of the ECB and (also in other jurisdictions) to how the many tools of central banks could be used to achieve broader policy objectives. As European elected leaders debate how to mobilize the private investment they all agree is needed in digital technology, green technology and defense-related manufacturing, it is irresponsible to maintain a taboo on the role of central banks in those agendas.
Central banks already pursue many objectives beyond price stability. Most have a role in financial regulation. The ECB has some responsibility for the international role of the euro. And in his impressive work on a digital currency, he takes seriously the geopolitical dimensions of money, while rightly expecting elected politicians to make decisions that only they can make. It could be beneficial to make them understand more strongly the geopolitical risks at stake.
The economic theory underlying the technocratic independence of central banks does not generalize to other policy areas. We have delegated monetary policy to technocrats because of the futility of trying to throw inflationary surprises at private economic agents. It does not follow that central bank action and policy objectives must be kept separate for all other issues as well.
What would it look like for the ECB to contribute more actively to the EU’s geopolitical priorities? These priorities recognize the imperative to allocate more resources to capital investments in certain sectors, as set out, for example, in the widely supported Draghi report. Capital allocation is something that central banks cannot help but influence, but they universally aim to adopt a stance of neutrality in this regard.
An alternative would be targeted loans. In the past, the ECB’s “selective long-term repurchase operations” instrument offered banks financing below the normal policy rate as they boosted lending to businesses (it mimicked the previous “long-term financing” policy). for loans” from the Bank of England). An updated version could offer similar incentives to banks that expand lending to sectors designated as strategic by the eurozone’s democratically elected leaders (whether for decarbonization, digital innovation or defense-adjacent infrastructure) without picking individual winners. .
Such a dual-rate system (especially with a commitment to keep the target rate low) would shift capital flows toward priority sectors chosen by governments. If such incentives made demand overall excessively inflationary, the main official interest rate would be adjusted accordingly. That would reduce activity in non-priority sectors, but that is the reallocation of resources that democratically established priorities require.
Sanctions policy is another area where central banks play a role. In the debate over whether to seize blocked Russian currency reserves to enforce Moscow’s compensation obligations to Ukraine, the ECB has chosen to put up strong resistance. But its mandate is to support EU policy, not shape it.
A good example: Saudi Arabia and China have allegedly threatened get rid of French sovereign bonds if Paris supports the confiscation of Moscow’s reserves. It is up to French and other EU leaders to choose how to respond. But the ECB has a “transmission protection instrument” dedicated to preventing eurozone government financing crises for non-economic reasons. It should publicly declare its willingness to use the ICC against any politically motivated attack on sovereign bonds, increasing governments’ room for maneuver. In its supervisory capacity, it could also order the segregation into separate vehicles of Moscow’s blocked reserves in Euroclear Bank and other eurozone banks.
All this would have to be democratically anchored. But the biggest risk is choosing helplessness and completely ignoring the geopolitical capabilities of central banks.