The Euro, the ECB, and French Elections

The European Central Bank is one of the most politically independent central banks in the world. In designing this institution, governments sought to insulate it from political pressure. Yet, the ECB has become an issue in the French presidential election.

French presidential candidate Nicolas Sarkozy said "he wants a ``real conversation'' with the European Central Bank on monetary policy, seeking a weaker euro currency to increase competitiveness. ``If we have created the euro, it's to use it,'' Sarkozy told reporters today at a briefing today. ``I will act within the eurogroup to give us an economic policy and to avoid economic shocks, get rid of the legal confusion regarding the exchange rate policy, and organize a real conversation between the eurogroup and the ECB.''

This should resonate with those of you who have read the last section of chapter 13 of my textbook (Independent Central Banks and Exchange Rates): "Because monetary and exchange-rate policies are two sides of the same coin, government control of exchange-rate policy can be used to force the central bank to pursue the monetary policies that the government and its supporters desire." This seems to be what Sarkozy is up to--using exchange rate policy to press the ECB into a looser monetary policy.

Segolene Royal has also criticized the ECB. "While Royal has criticized ECB President Jean-Claude Trichet -- pushed by French President Jacques Chirac for the post -- Socialists focused their attacks today on Sarkozy. `I will not defend Mr. Trichet here and I will not defend the ECB,'' said Socialist Party leader Francois Hollande today. ``But who appointed Mr. Trichet? We should find the person responsible for that.''

Such political dynamics is precisely why governments created an independent central bank at the center of euroland.