The governor of the Bank of Spain, José Luis Escrivá, has vindicated this Friday the work of central banks in an increasingly complex world. In a conference with Agustín Carstens, director of the Bank for International Settlements (the central bank of central banks), and Mário Centeno, governor of the Bank of Portugal and member of the Governing Council of the European Central Bank (ECB), Escrivá put the focus on how difficult it is to set monetary policy in a context of increasing unexpected negative events and challenges to the independence of these organizations.
“Black swans have been increasingly common in the last 15 years,” said Escrivá, giving as examples the Great Financial Crisis, the subsequent debt crisis in the eurozone, the unprecedented health crisis with the coronavirus and war conflicts. in Europe on the same European soil. “We have to use instruments that go beyond our usual scope,” highlighted the also member of the Governing Council of the ECB and former minister of Pedro Sánchez in a round table aimed precisely at highlighting the need for autonomy of the central banks to the time to dictate its monetary policy.
“The independence of central banks is an institutional achievement that cannot be taken for granted. To respond to current challenges, it is essential to reinforce the effectiveness and credibility of the monetary authority in the fulfillment of its mission, clearly delimiting the legal framework that sustains it and enhance its transparency and accountability to society,” stated Escrivá.
In his presentation, the governor warned against euroscepticism, which he described as a variant of populism and a threat to the independence of banks “very dangerous if it ends up taking hold.” “Central banks operate in a challenging environment in which there is a context of greater autocratic attitudes in some governments and in which we are addressing a wide variety of functions. To respond to these challenges, we must be effective and have specific and well-defined mandates. delimited,” urged the head of the supervisory body. “The more autocratic a Government is, the more difficult the relationship,” he stressed.
On the other hand, Escrivá has pointed out that “the reality is that central banks do more and more things because they impose more responsibilities on us” linked to secondary support functions. For this reason, he has asked to “stop and reflect” since, according to his point of view, “these other objectives cannot be developed with the level of autonomy and independence with which we develop monetary policy.” In this sense, he has stressed the importance of being “extraordinarily rigorous, objective and reducing the spaces of discretion to the maximum.”
“It is very dangerous to perceive that decisions such as interest rates are made remotely in Frankfurt and in English,” Escrivá has given as an example, recalling the damage done during the financial crisis by the mantra that “there are some gentlemen in Brussels, unelected, bureaucrats, who make the decisions. “We have to make a constant effort at communication and proximity,” he promised.
Within the complexity of his task, Escrivá has recognized that it is easy to remember the axiom that the delegated powers that central banks have have a very clear limit: they cannot make decisions that have a strong impact on the redistribution of income. However, he admitted, sometimes the process becomes complicated and ends up generating “dilemmas.” An argument that the Mexican Carstens has shared under the metaphor that he was “first a drunk and then a bartender”, referring to the fact that he was first a politician in charge of the Economy and then a central banker. A parallelism to which Centeno, who was also a politician (he became head of the Eurogroup, the meeting of finance ministers of the eurozone) and later a central banker, has also ascribed.
Carstens: “There is no magic formula”
Precisely, it was Cartens who started the event by explaining the theoretical foundations of central banks. A speech in which he highlighted that “the independence of central banks is a fundamental component of social engineering aimed at preserving the value of money and keeping inflation under control.” Carstens also highlighted that “monetary policy frameworks have served society well, although if circumstances arise, they could be reviewed to ensure their effectiveness. In doing so, care must be taken not to overload the mandates of central banks.”
The general director of the BIS considers that the autonomy statutes of the vast majority of central banks share a logical structure that has proven to be correct, although he sees room for refinement in chapters such as the composition of governing bodies and the governor’s assignment processes. , as well as further specifying financial stability mandates.
Continuing with the need for central bank autonomy, Carstens highlighted that, although there is a consensus on its relevance, “there is no single formula for its adoption.” “There is no magic formula,” he stressed, adding that this also depends on national idiosyncrasies, inflation and financial stability.
However, in general, Carstens considers that the autonomy statutes of the vast majority of banks “share a logical structure that has proven to be correct” aimed at reinforcing trust, because this will make the institution more effective in the compliance with their duties. “In general, the fundamental pillars should not be disrupted, defended the director of the BPI in reference to issues such as the composition of governing bodies, the appointment processes of the governor or members of the board of directors.
Likewise, the Mexican also sees room to continue advancing as central banks in making stability mandates and instruments more precise, especially in light of the growing complexity of the financial system. “The vast majority of the fundamental pillars are there and work very well, although there are some margins where there could be some interesting ideas to improve the Statute of Autonomy,” he reiterated, stating that, if any modification is contemplated, it should be in the sense of reinforcing autonomy and increasing its legitimacy.
Centeno: “Independence is not a state of mind”
In turn, Centeno has stated that “independence is not a state of mind, but rather the technical capacity to develop rigorous analyzes and materialize them in conscious decisions in the interest of the public interest.” The Portuguese has defended that “it is very important to understand that the capacity of the instruments we have is partial in the face of complex situations and coordination is essential, because otherwise we will be rowing in the face of a very violent tide.”
The ECB official has also emphasized the importance and at the same time the difficulty of communicating its work to society, especially the consequences of not following its policies: “The communication of the counterfactual is the most important task of the central bank, explaining to society why a monetary policy is necessary”.
In a more casual tone, Centeno has claimed central bankers as “boring people” not prone to sudden changes. “We want to do things softly, like a bolero,” he has chosen as a metaphor, while at the same time he has used another musical metaphor to highlight the difficulties of his task. “Playing with life sometimes hurts, and our decisions sometimes cause some pain,” he said, paraphrasing the song by Mexican Amparo Ochoa.
“We make decisions every six weeks, but we are being evaluated every day. Millions of decisions are made every day looking at what we say,” Centeno continued, doubling down in his speech the demand that the central bank imposes on itself. “We cannot convey uncertainty, because others expect us to be able to explain where we are going, even if reality is complex.” Finally, he has recognized that, to remain independent, you have to have top technical capacity, we cannot be left behind.”
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