Another European Central Bank official has fallen victim to growing political pressure on independent monetary authorities to do more to support Europe’s struggling economy.
Over the past year, the processes for appointing Europe’s top financial officials have repeatedly been snarled up in domestic politics, as elected leaders — desperate to find ways out of an economic downturn — seize on opportunities to impose more politically engaged central bank governors.
The latest victim is Mārtiņš Kazāks, governor of the Bank of Latvia since 2019 and a member of the ECB’s policy-making Governing Council. On Dec. 21, the owlish, outspoken governor ended his first term without the government having named a successor. The ruling coalition abruptly dropped him in December from a list of candidates that was to be presented to parliament, after one of its parties criticized him for not doing enough to support domestic growth.
A new list is being drawn up for a vote by Jan. 31, but Kazāks is now on the outside track, having been re-nominated by opposition lawmakers.
“There’s a push for central banks to get involved in areas where they shouldn’t, and this is not good,” Kazāks told POLITICO by phone. “It erodes the mandate and independence of the central bank, which runs the risk of destroying the institutional setup.” Political leaders are looking for “scapegoats,” he added.
Such drama has become par for the course across Europe in recent months as governments struggle with the hangover of the pandemic and the Ukraine war, which have combined to cause the worst bout of inflation in a generation. That has eroded the authority of a central bank that enjoys extraordinary power and privileges under the EU’s treaty.
The pressure from the economic cycle is being made worse by other factors, not least demographic decline and the prospect of a radical reordering of transatlantic relations as Donald Trump returns to power. Former Italian Premier Mario Draghi estimated last year that Europe needs to find up to €800 billion annually in investment to avoid the “slow agony of decline.”
National governments have no legal influence over the monetary policy of the ECB. However, they do control who gets to head their own central bank. In addition to having a vote on the ECB’s policy-making council, the governor can be a useful ally in shaping debate on domestic economic policy. As such, most like to have a trusted face in the post.
Some, however, have taken it to extremes. Last year, Spanish Prime Minister Pedro Sánchez appointed a serving Cabinet minister and political ally, José Luis Escrivá, to succeed Pablo Hernández de Cos at the Bank of Spain, enraging the opposition and independent economists, while Cyprus’ president installed his closest adviser at the head of the island nation’s central bank.
Croatia’s Boris Vujčić and Belgium’s Pierre Wunsch were both made to sweat on their reappointments after individual parties grumbled about them not being sufficiently aligned with their interests. Slovenia’s Boštjan Vasle has failed to secure a second term thanks to similar maneuverings — and there is still no agreement on his replacement. In Rome, meanwhile, a controversial law has been revived that would tighten political oversight of the appointments to the Bank of Italy’s board. A further six of the 20 national governors are up for either re-appointment or retirement this year.
A local governor for local people
To Kazāks, the wrangling in Latvia epitomizes the new trend of politics chipping away at central bank independence.
The former governor pointed to a record of bolstering financial stability, reducing overheads at the Bank and repairing its reputation abroad, after an ugly Russian money laundering scandal that tarred the institution and led to a conviction for his predecessor. He said he had relaxed mortgage requirements for new homeowners as soon as he was given the power to do so and eased certain restrictions on bank account ownership.
But the Greens and Farmers Unions, a coalition member, slammed him for his failure to “speak out against” the negative effects of high interest rates on the economy, leading the New Unity party of Prime Minister Evika Silina to drop its support, too.
Since it joined the EU, Latvia has been accustomed to rapid growth punctuated by two big contractions. But the economy flatlined last year, growing only by an estimated 0.1 percent, down from 2 percent in 2023. The current sense of stagnation is something not experienced since late Soviet times.
Greens and Farmers chairman Harijs Rokpelnis said Kazāks could have done more to address concerns over a downturn in credit growth, particularly in rural areas, where financial services are hard to access and bank branches are scarce. The local governor, he said, should pay more attention to local issues.
“I’m not sure it’s a good signal that a representative of Latvia goes out as spokesperson for the whole of Europe and proudly announces that interest rates are going up,” Rokpelnis said, calling Kazāks’ regional perspective “a bit secondary.”
Andris Šuvajevs, co-chair of the Progressives, the other coalition party, agreed that the Greens and Farmers were justified in wanting a shift in focus and said the process shouldn’t be seen as politicians seeking greater control over the central bank.
Kazāks countered that the EU treaty requires him to conduct monetary policy in the interest of the eurozone in general, rather than follow national interests.
Regulations to improve credit growth and bank access, he said, must ultimately come from legislators. By contrast, monetary policy should be seen for what it is: a blunt tool that can only do so much to boost business activity.
“Monetary policy cannot do anything to solve the low productivity story,” he said. “[Loose policy] does not mean that growth is there, it’s only one of the elements. You can’t make a soup only with onion — well, the French can — but it’s much more intricate.”
For now, the Bank is being led by Acting Governor Maris Kalis. But he and fellow board member Zita Zariņan end their respective terms in March and April. Unless the lawmakers get their act together, the board will be left with three people, below the required quorum of four to make decisions.
Sensitive to concerns of meddling, the ruling parties say they are looking for a new candidate who is at once a reputed monetary economist and has a “vision” for financial services. As Rokpelnis acknowledged: “There’s not a large pool of candidates.”