Central Bank Autonomy Is Under Attack
Current events in Cyprus and Turkey hammer home a point that former Federal Reserve Chairman Alan Greenspan made in the memoirs he published in September 2007. Central bank independence, Greenspan said, is "not set in stone." Left unsaid was the fact that it should be. Against an ever-shifting political backdrop, monetary policy can provide a bedrock of economic certainty -- but only if central bankers can discharge their duties without fear of government interference.
In Cyprus, President Nicos Anastasiades has begun the process of dismissing central bank Governor Chrystalla Georghadji. Her offense is failing to disclose the entanglement of her estranged husband in a lawsuit about the failed institution Laiki Bank.
This wouldn't mark the first time the government has gotten rid of an interest-rate chief it didn't like. One year ago, it engineered the resignation of Panicos Demetriades who was also accused of mishandling his involvement in Laiki Bank's collapse. Demetriades had been appointed by the previous administration; once in office, Anastatasiades made no secret of his desire to oust the central banker. Now he wants to dispense with the services of Georghadji, a former attorney general who's being investigated by her successor.
Cyprus, which needed a bailout from its euro partners two years ago, is only now easing the accompanying capital controls introduced to stop its economy from melting down. With its neighbor Greece teetering on the brink of having to exit the euro, Cyprus can't afford a cavalier disregard for the autonomy of its national central bank.
Turkey should provide a cautionary lesson in this regard. The harder the government there has leaned on its central bank to cut interest rates, the lower investors have driven the nation's currency. Investors are understandably wary of keeping money in a country where politicians try to steal control of borrowing costs from the central bank. The lira got a brief respite this week from setting new record lows against the dollar when Governor Erdem Basci, after a meeting last week with President Recep Tayyip Erdogan, kept policy on hold for the first time in three months.
Cyprus doesn't have its own currency that investors can shun. But it still might find that capital will again start fleeing the country if its own central bank is made subject to the whims of the government. Moreover, central bank autonomy is enshrined in the European Union treaty.
Last year, the European Central Bank made a half-hearted intervention to safeguard the independence of Cyprus's central bank. It needs to do better this time. Earlier this week, the ECB warned the Cypriot president not to trample on the independence of its national central bank. President Mario Draghi should go further, making it clear to the president of Cyprus that he won't allow central bank autonomy to be the plaything of politicians.
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