It is important to draw a demarcation line between politics and electoral agendas (a changing ‘game’) and the foundations which underpin our democratic systems (a minimum common denominator for the different parties across the political spectrum). A democracy is based upon a system of checks and balances (division of powers) and respect for the rule of law. It requires independence of the judiciary for it to work, as well as free elections and recognition of certain freedoms and human rights.

To present some of the traditional bastions of democracy, in particular the judiciary and the ‘nonconforming’ media (free speech), as ‘enemies’ of the people opens a slippery slope. Attacks on the judiciary – questioning their impartiality – are attacks on the rule of law. There is always a danger in popular mandates that override every other check and balance. History provides a powerful warning against the emergence of regimes where dissent is not permitted or where those who oppose the regime are vilified or threatened (Wolf 2017a, b).Footnote 8

Moving from these important constitutional and philosophical matters to the theme of our paper, we can identify at least three dimensions in the debate of how the rise in populism - or simply general discontent with the status quo - affects central bank independence.

First, the dimension of legitimacy. Legitimacy pre-exists and is a requisite of accountability. Legitimacy in turn is rooted in the concept of sovereignty.Footnote 9 There are two aspects to legitimacy: formal and societal.Footnote 10 According to the former, the creation of an independent central bank must be the fruit of a democratic act: an act of the legislator, a constitutional decision or a treaty provision (non-democratic regimes also have a notion of formal legitimacy embedded in their systems). ‘Societal’ legitimacy refers to the support by the public, and is determined by the acceptance of, or loyalty to, the system. Of course, societal legitimacy can be fickle since public acceptance is also influenced by politics, the media, current events, changes in circumstances, sentiment, and other factors. In any case, when societal legitimacy weakens or is no longer present, the law is bound to change.

Any democratic regime can alter the mandate of the central bank following the required normative procedure (a statute for example can always be replaced by another statute; Constitutions and Treaties are more difficult to revise, but they are not immutable).

While the initial legal basis ‘legitimizes’ the establishment of the independent central bank, it cannot by itself legitimize on an ongoing basis the exercise of the powers delegated to such agency. It is then in the continuing life of that entity that accountability becomes necessary to ensure legitimacy. An accountable central bank must give account, explain and justify the actions or decisions taken, against criteria of some kind, and take responsibility for any fault or damage.

Compared with other government agencies, central banks are very powerful entities since they are guardians of monetary stability (and financial stability) and dictate price levels, influencing the level of risk-taking in the economy.Footnote 11 Central banks’ monetary policies also have important redistributive effects. That is why accountability is of the essence.

Central banks are not majoritarian, democratic institutions. Central banks are, instead, technocratic bureaucracies, staffed by career employees and, typically, a few leaders elected by the political authorities. It might be said that any bureaucratic agency is non-majoritarian…But the problem is greatly exacerbated in the case of central banks as compared with typical bureaucracies. Central banks do not simply administer a technical regulatory scheme affecting discrete industries or interests. They regulate price levels, which is one of the most fundamental powers of government, and one of the most important practical concerns of the public at large. Footnote 12

Secondly, the mandate. The agreement on the goal (price stability and/or financial stability) provides the justification for CBI, given the ‘instrumental’ nature of independence. Independence is an instrument to achieve a goal or set of goals. The importance of the goal is therefore the key consideration in designing an adequate legal framework for its pursuit. Some German commentators referred to the arrangement that governed the Bundesbank - namely a price stability oriented monetary policy conducted by an independent central bank - as a constitutive element of ‘Ordnungspolitik’, of the economic and political order that should be a common denominator accepted by different political parties.

Questioning the goal also leads to questioning specific central bank policies, actions or decisions taken to achieve such goal/s, for example QE and other unconventional instruments of monetary policy.

When a central bank has several goals, for example, the US Federal Reserve System, the central bank can change policies more easily than when a central bank has a narrowly defined goal, as is the case of the European Central Bank or before 1999 of the Bundesbank. The existence of several unranked objectives - or an unspecific mandate - complicates the exercise of performance accountability.

With expanded mandates, central banks require new mechanisms of accountability (Balls et al. 2016).Footnote 13 This has been the subject of much debate given the significant role that central banks have acquired as crisis managers, macro-prudential and micro-prudential supervisors and, in some cases, as resolution authorities. Lord Acton’s dictum lurks in the background. Accountability remains first and foremost a mechanism to prevent the abuse of power.

As the mandate has become fuzzier, broader and more complicated – with unconventional monetary policies and the renewed emphasis on financial stability – the consensus which surrounds the goal/s crumbles and with it the importance of independence diminishes (Khan 2017).Footnote 14 The delegation of macro-prudential supervision and financial stability to the central bank could become more problematical than inflation targetry, because it is so much harder to monitor, and you cannot really tell whether the authorities are on the right track, or not. It is remarkable: (1) that almost all of the criticism of CBs relates to their monetary policy actions, rather than giving them extra powers to achieve financial stability, and (2) that CBs have also been the ‘only game in town’,Footnote 15 so one might have expected that public concern with inactivity in fiscal policy and supply side measures to have been more vocal, whereas the criticism seems to be focussed on the only institution trying to do much. Moreover, an independent central bank – as a specialised technocratic agency – operating without electoral or partisan influences or constraints can do a better job at preserving monetary and financial stability than a political authority that seeks re-election and is thus subject to time inconsistency problems.

Paul Tucker has explored the challenges to CBI and the contours of macroprudential policy in a recent paper (Tucker 2017).Footnote 16 He urges ‘the central banking community not to become too powerful’ and suggests that stability policy should focus on a ‘standard of resilience’ (tolerance to crisis) rather than ‘managing the credit cycle’. It would be interesting to see whether some composite rating (akin to CAMEL for micro prudential supervision in the US) could be developed for financial stability purposes - independently from the central bank - and such a rating could then be applied as a standard of resilience. He differentiates between ‘regulatory policy’ (which is open to challenge in courts) and ‘balance sheet policy’ (which is less likely to be challenged in courts but may expose the state to fiscal risks). He warns central banks about becoming ‘over-mighty citizens’ and points out that the heavy lifting of sustainable economic recovery is in the hands of governments (not central banks), since only they can remove obstacles to greater dynamism in the supply side of the economy.

Vitor Constâncio has also considered the contours of macro-prudential policy (Constâncio 2017),Footnote 17 suggesting a further expansion of the ‘boundaries’ of macroprudential policy beyond the banking sector and into the shadow banking system. While this approach is a reflection of the changing nature of financial markets it also posits the question of where to draw the boundaries.Footnote 18

The question of excessive reach, that is whether central banks have abrogated to themselves powers which are not in the mandate, and the legal interpretation of whether a central bank is abiding by the mandate or exceeding its powers, are fundamental issues in a democratic system.

What is clear is that if the mandate gets overstretched the balance between independence and accountability should tilt towards accountability. This can take many forms: additional disclosure requirements, further parliamentary oversight and judicial scrutiny. And ultimately a change in the law – reflecting the expanded mandate – might be the right course of action in a democracy, since any expansive interpretation of delegated central bank powers within a given legal structure should be limited in time.

Thirdly, the dimension of personnel (‘central bankers’). Explicit or implicit attacks on central bankers can provide ammunition to politicians in front of their constituencies and/or in front of the electorate at large. If central bankers (those at the helm of their institution in particular) are perceived as critical of the government in power or if their policies are – rightly or wrongly – blamed as being a constitutive part of the popular discontent that propelled populism or a change of government in the first place, they will be criticised. In the current political and economic climate, it has become expedient to blame those – banks, financiers and also central banks – who are partially held responsible for the crisis and for the loss of living standards of a large segment of the population and who appear to remain largely unpunished. We should however beware of turning central bankers into scapegoats and of unduly restricting the flexibility needed to be able to access the best pool of talent (Giugliano 2015a, b).Footnote 19

Appointment and dismissal procedures are important indicators of legal and de facto central bank independence.Footnote 20 A ‘pluralistic’ appointment procedure aims to avoid politicization. By pluralistic we mean ‘diversified’ membership of the central bank governing bodies, bringing different views to the conduct of central banking tasks, based upon region, gender, sector and/or expertise. In a geographically decentralized structure of government (such as a federal country), membership on the basis of region is important so as to represent the various interests of various parts of the country (or Union, as in the case of the EU). Indeed, in the case of the ECB, the key positions in the Executive Board, in particular the post of President, should not be tainted by political meddling or positioning of ‘key Member States’.

Membership based upon sector refers to the inclusion of the various sectors of the economy: industry, commerce, agriculture. For instance, in the USA, the Federal Reserve Banks have a Board of Directors with nine members each (and the president of each Federal Reserve Bank must be a person of ‘tested banking experience’). Of those nine members, three members are known as Class A Directors, who are required to be representatives of the member banks, and may themselves be bankers. Three others are designated as Class B Directors, and must represent industry, commerce, and agriculture in the district and must not be officers, directors, or employees of any bank. The remaining three comprise the Class C Directors and are appointed by the Board of Governors of the Federal Reserve System. In the UK, the main criterion for membership of the Monetary Policy Committee is expertise in either monetary policy, financial markets, or the running of the economy in general (at the macro or micro level). The ESCB combines a geographic criterion (because of the composition of the European Central Bank and the national central banks) and criteria based on expertise (the members of the Executive Board must be selected among ‘persons of recognized standing and professional experience in monetary or banking matters’).

Another recommendation is for ‘professional independence’, which is enhanced by the appointment of qualified candidates, well versed in monetary economics and central banking theory and practice. Professional independence is also safeguarded by the establishment of a list of incompatible or disqualifying activities so as to prevent conflicts of interest. For instance, while in office central bankers should be precluded from simultaneously holding private-sector jobs. Central bank officials should perform their duties on a full-time basis (with the possible exception of academic/university engagements). A central banker should not be simultaneously a financial adviser, an employee or a shareholder of a bank, or a member of parliament, as those occupations would engender conflicts of interests. Central bank officials should also be limited in pursuing private employment in credit and financial institutions for a reasonable period following their term of office. These restrictions are designed to preclude their susceptibility to ‘private’ incentives while in office. Such provisions are particularly necessary to avoid the ‘capture’ of the regulator by the regulated institutions (the so-called ‘revolving door’).Footnote 21

A further safeguard of professional independence refers to the procedures for dismissal of central bank officials. Grounds for dismissal should be clearly defined in the law, including criminal offence or serious misconduct and permanent incapacity. Grounds for dismissal should not include ‘displeasure’ with central bank actions, or criticism that the Governor or other members of the governing bodies are not fulfilling their obligations.

The UK Prime Minister, Theresa May, criticised the ‘bad side effects’ of Bank of England policies at the Conservative conference in October 2016, prompting Governor Mark Carney to declare that he would not ‘take instruction’ from politicians on how to do his job (Bruce & Hobson 2016).Footnote 22 Janet Yellen, Fed chair, was criticised during the campaign by the then Republican nominee (now President) Donald Trump (The Economist 2016; Liesman 2016),Footnote 23 leading some commentators to talk about the risk of ‘politicisation of the Fed’ (Davies 2016).Footnote 24 Marine Le Pen in France (who obtained almost 11 million votes in the recent presidential elections on May 7th, 2017) vowed a “revolution in proximity”, promising more decision-making by French people and less by global financial forces and multilateral institutions, while the FN manifesto had called for the re-creation of the French franc (Stothard 2017).Footnote 25

Attacks on central banks or central bankers exceeding their mandate or remit (or not performing their mandate as expected by politicians) are often disguised attacks on central bank independence (Münchau 2017a, b; The Economist 2016).Footnote 26 This can undermine their credibility.