A series of verbal attacks by Italian Deputy Prime Minister Matteo Salvini on the country's central bank is just the latest attempt to undermine the independence of central banks by politicians in Europe and beyond, according to analysts and economists.
Salvini, also Italy's minister of the interior, promised in February that he would purge top officials at Banca D'Italia SpA and market watchdog Consob because of their failure to prevent a series of banking scandals. He was speaking to members of the public in Vicenza, home to Banca Popolare di Vicenza SpA, which collapsed in 2017, wiping out the savings of thousands of customers.
And while he may tone down his rhetoric after the European elections in May, his dismissive attitude toward central bank independence, and toward the norms of the European Central Bank, set a concerning precedent, observers say.
Salvini also floated the idea of using the Italian central bank's gold reserves to plug a growing national deficit.
The deficit was a flashpoint in 2018 after the government proposed an expansionary budget that would have taken it to 2.4% of GDP — a level that could have prompted sanctions from the EU. The Italian government reached a compromise with the European Commission over the budget in December 2018, but not everyone was happy. EC Vice President Valdis Dombrovskis said the agreement was "not ideal."
Italy's deputy prime minister and minister of the interior, Matteo Salvini
Source: Associated Press
Salvini's comments are more than just bluster, according to Desmond Lachman, a fellow at the American Enterprise Institute, a conservative think tank.
They are serious because they indicate that he has little regard for the independence of Italian institutions and that he is not concerned about broadening Italy's disagreement with the European Commission from one over Italy's budget to one over the independence of its central bank, Lachman said in an email.
Salvini would be wise to tone down his rhetoric, Lachman said, because Italy slipped into recession at the end of 2018 and has "a mountain" of public debt, meaning it may end up having to seek help from its European partners.
"Salvini should know that it is not a good idea to bite the hand of those whom he might need to feed Italy," Lachman said.
He also noted that Salvini is not in a position to overhaul the central bank on his own. That would require approval from the president, and the ECB could also intervene.
'A lot of bad things could happen'
Panicos Demetriades, professor of financial economics at the U.K.'s University of Leicester, who served as governor of the Central Bank of Cyprus from 2012 to 2014, said Salvini's remarks set a concerning precedent, not just for Italy, but for the entire euro project.
"The monetary union rests on independent [national] central banks," he said in an interview.
National central banks in the eurozone cede much responsibility for banking oversight and interest rate-setting to the ECB, but it is dangerous to overlook their importance in maintaining neutral, transparent policy making and supervision at an EU-wide level, Demetriades said.
"They are the eyes and ears of [the ECB's Single Supervisory Mechanism]," he said. "If they were to start promoting their own national interests, a lot of bad things could happen."
Although the ECB supervises most large eurozone banks, which account for about 82% of euro area assets, national central banks retain direct oversight of about 3,500 smaller institutions, which make up the remaining 18%. They are also responsible for collecting data on banking and economics at a national level and feeding it back to the ECB.
Demetriades quit his post at the central bank of Cyprus in 2014 just two years into a five-year term, which he says was due to relentless political pressure from the government of right-wing President Nicos Anastasiades. He said he faced repeated interference from the government, including pressure to sell off some of the central bank's gold reserves.
Demetriades said he is disappointed that EC officials have not done more to back up Italian central bank officials. So far only Dombrovskis has made comments to the media about the need to preserve central bank independence following Salvini's speech.
"It's interesting that no one else has spoken up," he said.
A broader pattern
For Demetriades, the Italian politician's recent attacks on the country's central bank are part of a broader pattern emerging on the continent, which bodes ill for the integrity of the euro. As well as Cyprus, there have been repeated challenges to central bank independence in Slovenia, he said.
Bostjan Jazbec quit as governor of Banka Slovenije, the Slovenian central bank, in 2018 after receiving anonymous death threats. He told the media at the time that he believed that the threats came from people who had lost money during a €3 billion state bail-in of the country's banks between 2013 and 2014, which averted bank collapses but led to about 100,000 bank shareholders having their investments wiped out.
Meanwhile, Hungary's government has been undermining the independence of that country's central bank, Magyar Nemzeti Bank, "in a manner that has raised alarm bells with European partners" for several years, according to Lachman.
Brussels has repeatedly expressed concerns about MNB's cozy relationship with the Hungarian government and its involvement in tasks that fall outside the usual remit of a central bank and that could cause a conflict of interest when it comes to setting monetary policy, such as promoting financial literacy programs and purchasing Hungarian artworks.
Juan Castaneda, director of the Institute of International Monetary Research at the U.K.'s Buckingham University, said that central bank independence has been quietly eroded since the global financial crisis and euro crisis years anyway, as national-level central banks have stepped into the role of lender of last resort for their respective governments.
"Once a central bank becomes the major lender of a state, its independence in setting policy rates (which critically affect the value of its own portfolio) is very much compromised," Castaneda said in an email.
While the ECB provides wholesale lending to the eurozone monetary system as a whole, it is the role of the national-level central banks to provide funds to lenders in their own country that run into a liquidity crisis, Castaneda noted.
But politicians should refrain from interfering with central bank policies as much as possible, he said.
Beyond Europe, analysts have raised concerns about the independence of the Philippine central bank, Bangko Sentral ng Pilipinas, after the surprise announcement earlier in March that Budget Secretary Benjamin Diokno, a close associate of president Rodrigo Duterte, would take over as governor.
In the U.S., President Donald Trump has frequently criticized the Federal Reserve, and it emerged in December 2018 that he had discussed firing Fed Chairman Jerome Powell.