The recent global economic crisis has renewed interest in the nature and history of monetary policy, the distributional effects of central bank policy, central bank governance, and the personalities at the helm of major central banks. In modern times, a country’s central bank formulates, or, to a minimum, implements, a country’s monetary policy, or the process of adjustment of a country’s money supply to achieve some combination of stable prices and sustainable economic growth. Monetary policy depends heavily on a country’s exchange rate system. Under fixed exchange rates, the country’s commitment to keep the level of the currency at a certain level dictates monetary policy to a great degree. As the gold standard was unraveling after World War I, many countries experienced high inflation or even hyperinflation. A similar situation faced monetary policy after the collapse of the Bretton Woods system of fixed exchange rates in the 1970s. By the 1980s, however, countries turned toward central bank independence as an institutional arrangement to control inflation. The current issues surrounding monetary policy have emerged from the historical increase in central bank independence and the 2007 economic and financial crisis. In particular, the opacity of central bank decisions, given their autonomy to pursue stable prices without political interference, has increased the demand for transparency and communication with the government, the public, and financial markets. Also, the 2007 crisis pushed central banks toward unconventional measures and macro-prudential regulation, and brought back into focus the monetary policy of the euro area.
The European Central Bank (ECB) has been in existence for almost 20 years and more if one considers its immediate predecessor the European Monetary Institute (1994–1997). During these two decades the ECB has become an established institution. It secures price stability and further increased its reputation as a lender of last resort during the financial crisis and its aftermath. In the 2010s, in response to the global financial crisis and the sovereign debt crisis, the ECB has also taken on the role of supervisor of the financial system and monitors developments in the Euro Area financial sector. Political science literature on the ECB can be subdivided into different strands. One strand looks at the ECB as just another central bank and hence examines its role as a central bank with the usual instruments. Another strand of literature examines the role of the ECB as an institution that is insufficiently embedded into democratic checks and balances. This perennial criticism of the ECB was born when the European System of Central Banks (ESCB) was created to be independent from political influence. A third strand of the literature is newer and examines the unorthodox steps that the ECB (and other central banks) took, and have taken, to offset the financial crisis and the ensuing economic crisis. An analysis of European integration and the political economy of the Euro Area can contribute to a better understanding of why the ECB has taken a proactive role. The political science research of the ECB is discussed here as well as the various dimensions of research conducted on the ECB.
Finn Laursen and Sophie Vanhoonacker
The Maastricht Treaty, which created the European Union (EU), was signed in Maastricht on February 7, 1992, and it entered into force on November 1, 1993, after being ratified by the then 12 member states of the European Communities. The Intergovernmental Conferences (IGCs) on Political Union (PU) and Economic and Monetary Union (EMU) where the member states negotiated the amendments to the founding treaties took place against the turbulent geopolitical background of the fall of the Berlin Wall (1989), German unification, and the end of the Cold War. The new treaty amended the Treaty Establishing the European Economic Community (EEC) and established the European Community (EC) as the first pillar of the Union. It also amended the Treaty Establishing the European Coal and Steel Community (ECSC) and the Treaty Establishing the European Atomic Energy Community (EAEC). It further added two pillars of intergovernmental cooperation, namely Common Foreign and Security Policy (CFSP) in a second pillar and Justice and Home Affairs (JHA) cooperation in a third pillar. Overall, the Maastricht Treaty constituted one of the most important treaty changes in the history of European integration. It included provisions on the creation of an Economic and Monetary Union (EMU), including a single European currency. It tried to increase the democratic legitimacy and efficiency of the decision-making process through empowerment of the European Parliament (EP) and the extension of Qualified Majority Voting (QMV). Next to introducing the principle of subsidiarity and the concept of European citizenship, it further developed existing policies such as social policy and added new ones including education, culture, public health, consumer protection, trans-European networks, industrial policy, and development cooperation.