Abstract
In the aftermath of the 2008 financial crisis, there has been a major scholarly revival of the topic of financial political power and a refocus on questions concerning democracy, elites, and inequality. Nevertheless, there remains a dearth in the literature regarding the precise nature of the political relationship between the financial sector and central banks. This is problematic given the sharp rise in institutional prominence enjoyed by central bank officials in the post crisis era and their fundamental importance in the governance of financial markets. As a corrective, this paper develops a provisional analytical framework through which the power dynamics between the financial sector and central banks can be fruitfully explored, specifically with reference to the European Central Bank. It does so by identifying four mechanisms through which financial actors potentially influence the policy choices of the European Central Bank – revolving doors, closed policy circles, capital flight/disinvestment, Too Big to Fail – and illustrates their operation empirically in the context of the bank’s organizational functioning and post crisis interventions. The paper illustrates how financial actors enjoy systematic advantages in the domain of central bank policymaking and provides significant evidence that the European Central Bank has been a key ally of the financial sector throughout the Eurozone crisis. The paper calls for a more extensive examination by scholars of the financial sector-central bank relationship as a means to clarify the precise scope of, and limitations to, contemporary financial political power.
Keywords
Introduction
This paper adds to the renewed interest in financial political power by examining the ways through which the financial sector potentially influences the policy activity of the European Central Bank (ECB). Through a mechanism-based analysis of policymaking influence, and an empirical investigation into the ECB’s organizational functioning and political interventions, the paper demonstrates how the bank plays a key role in preserving the politico-economic salience of finance within the European Union (EU) in the post crisis era. Given the growth of the ECB’s supervisory remit and its emergence as a leading authority on regional integration and economic governance, the findings have important implications for the democratic functioning of EU policymaking.
Specifically, the paper elaborates upon four mechanisms through which financial actors are able to impact the policymaking activity of ECB officials and skew political outcomes in their favour. At the level of instrumental power, the phenomena of ‘revolving doors’ and ‘closed policy circles’ generate close interpersonal and professional relationships between private actors and central banking officials. These processes facilitate a disproportionate level of access for financial actors to key governance fora and foster (elite) private–public sector compatibility on core objectives. At the level of structural power, ‘capital flight/disinvestment’ and the ‘Too Big to Fail’ dilemma create a unique relationship of state-financial sector interdependence and determine a privileged position for finance within policy battles. Faced with the threat of declining investment, competitive damage, and contagion effects, central bankers are extremely cautious in imposing an economic burden on financial firms, leading them to frequently adopt policies that are closely aligned with investor preferences.
The paper proceeds in four parts. The first section takes stock of the growing post crisis literature on financial political influence and highlights the absence of any sustained interrogation into the power relationship between the financial sector and central banks as a major oversight. As a corrective, the paper proposes an examination of the potential routes through which financial policymaking influence is produced, exercised, and manifest, in the case of the ECB. The second section elaborates conceptually upon the instrumental dimension of power, before providing an empirical analysis of the composition of the ECB Executive Board, conflict of interest management, and the bank’s uneven engagement with civil society. The third section provides conceptual elaboration on the structural dimension of power, before analysing the political activity of the bank at the height of the Eurozone crisis – in particular, the conduct of monetary operations, resistance to bondholder losses, and the bank’s controversial intrusion into member states’ economic and fiscal policy. The fourth section concludes by indicating several directions for future research.
Financial political power and the absence of central banking
Since the 2008 financial crisis, scholarly investigation into the relationship between finance and the state has flourished on several fronts. Authors have documented the unique capacity of financial actors to dominate policy priorities in the decades preceding the crash, resulting in cross-national trends of financial deregulation and excessive build-up of household and corporate debt throughout the global economy (Bell and Hindmoor, 2015; Johnson and Kwak, 2013; Schwartz, 2009). These developments are often framed within the context of ‘financialization’, which has brought to the fore an era of liberalized currency regimes, market-based financial systems, increased speculation and financial engineering, and the rise of shareholder value logics (Crotty, 2009; Davis and Kim, 2015; Krippner, 2012). Others have focused attention on the process of post crisis regulatory reform, indicating the enduring involvement of financial elites in key governance circles, and demonstrating how regulatory initiatives have been stymied by the political mobilization of diverse elements within the financial industry (Bieling, 2014; Pagliari and Young, 2014; Underhill, 2015). Such studies have reignited theoretical progress on the wider topics of business power and elites (Culpepper, 2015; Davis and Williams, 2017; Woll, 2016), and brought longstanding debates about capitalism, democracy and inequality to the forefront of academic discussion (Piketty and Goldhammer, 2014; Streeck, 2016).
However, despite renewed attention to the modalities of financial political influence over national governments, political representatives, regulatory authorities, and various supranational agencies, the power relationship between the financial sector and central banks remains highly ambiguous. In particular, exploration of the precise means through which the financial industry is able to influence the policy activity of central banks remains thoroughly under-analysed and represents a major dearth in the literature. In a certain sense, this is understandable. The operational independence granted to modern central banks marks them off as a unique institutional organ within the apparatus of the state and seemingly more resistant to conventional routes of political influence. As such, the operation of central banks might be considered similar to that of the judiciary: an organ of the state that is purposefully walled off from the ordinary pressures of political bargaining and compromise, partisan scrutiny, and the inherent vagaries of political events (Goodhart and Meade, 2003). Instead, the modern central bank purports to stand above the squabbles of everyday politics and make ‘public good’ policy decisions free from the persuasion of vested interests, both public and private.
On the other hand, there are good reasons for supposing that central banks are particularly susceptible to financial sector interests and that scholars should place the development of such analyses higher on the agenda. From a macroeconomic perspective, the emergence of a finance-led regime of growth within advanced economies has profoundly altered the goals and priorities of central banks over the last two decades. Central banks have re-oriented themselves towards the creation of greater financial depth as a means to facilitate more liquidity, thus providing easier access to credit for market participants, while also boosting the effectiveness of monetary policy in steering the economy (Engelen and Konings, 2010; Ronkainen and Sorsa, 2017). Closely related is the policy priority of maintaining high asset values – especially in real estate – which promotes a wealth effect throughout the economy and helps to stave off recessionary conditions. This was most notoriously demonstrated by the ‘Greenspan put’ in the 2000s that propped up stock prices and facilitated an excess of borrowing in US housing markets. The mechanism for a similar process within Europe was the disappearance of interest rate spreads for borrowing due to the progression of European Monetary Union (EMU) and major strides in financial market integration (Orphanides, 2017: 10). For central banks, these macroeconomic objectives recommended a close alignment with, and advocacy for, the policy preferences of private financial firms and investors. In turn, the liberalization and deregulation of financial markets instigated major innovation in complex financial engineering and underpinned the secular rise of the financial industry as a growing share of GDP.
One of the few books to explore the financial sector-central bank political nexus is Jacobs and King’s Fed Power, which identifies the Federal Reserve as a major culprit in causing the 2008 financial crash, in contradistinction to the ‘overhyped’ narrative of the bank rescuing the US economy from a Great Depression-style downturn (Jacobs and King, 2016: 6–15). In explaining a policy orientation towards ‘the well-being and accommodation of finance’, the authors outline three mainly institutional factors to account for the Fed’s ‘favouritism’ (Jacobs and King, 2016: 17). The first is the process of revolving doors whereby Fed officials benefit professionally from their lucrative employment by Wall Street firms either before or after their public service. The second is a complimentary ‘cultural capture’ whereby Fed officials adopt a pro-finance mentality through private lobbying, networks of collegial interaction, or shared ideological assumptions regarding the proper regulation of markets. The third is the self-interested motive of institutional preservation, as the Federal Reserve draws it budgetary resources from profitable operations within private financial markets – a fact that also secures its much-guarded independence from the US Congress.
Written in an accessible and polemical style, the book marshals a large array of evidence to sustain its thesis that the Fed is a key protagonist in the growing inequality of the US in recent decades. Nevertheless, as an empirically driven study, the book eschews substantive theoretical engagement with the wider literature on business/financial political power, and in consequence, provides a thin and unnuanced conceptual account of the sources sustaining a loose central bank-financial sector political alliance. Furthermore, the authors largely overlook the broader historical dynamic of financialization that is the result of a pro-finance policy consensus across multiple political fora (not just the Fed) and which has structurally entangled economic growth and competitiveness with the profitability of oversized financial institutions (Block, 2017: 519).
A similar shortage of examination into private sector-central bank power relations exists with regards to the ECB. This absence is particularly unusual considering the widely recognized politicization of the bank since the financial crash and its controversial interventions during the Eurozone crisis. Instead, much of the literature on the ECB since the crisis is devoted to evaluating the economic appropriateness of its deployment of monetary operations and its efforts in stabilizing markets. The ECB is sometimes discussed as a ‘leader’ (Verdun, 2017) or ‘saviour’ (Bibow, 2013) to which the Eurozone is indebted. Alternatively, the bank is considered to have been slow to act in its duties as a lender of last resort (De Grauwe, 2013), or hindered (Donnelly, 2014) and ‘overburdened’ (Braun, 2017: 8) in its ability to effectively ensure financial stability, usually as a result of German monetary conservatism (Matthijs, 2016). As such, the prevailing tendency has been to focus attention on the ECB’s technical efficiency and competency (or lack thereof) in attaining specific economic outcomes. Even studies that give explicit attention to the strategic political motivations of the ECB ignore the thorny question of financial sector influence and are focused instead on the ability of the bank to enhance its institutional prominence (McPhilemy, 2016), secure its policy preferences vis-à-vis other EU institutions and member states (Epstein and Rhodes, 2016) or guard its monetary independence (Henning, 2016; Schmidt, 2016).
What is required, then, is a sustained analysis that seeks to interrogate the ‘myth of neutrality’ conveyed by technocratic approaches and nurtured by the self-appraisal of central bankers (Adolph, 2013: 10). Importantly, nascent scholarship on this theme is beginning to emerge. Braun deploys the notion of ‘infrastructural power’ to indicate how the ECB’s governance and policy preferences are substantially shaped by its growing dependence on the technical architecture of a market-based financial system (Braun, 2018). Echoing the performativity claims of previous scholars (MacKenzie, 2006), this is said to give financial actors significant political leverage within policy battles, as the ECB becomes compelled to pursue policy objectives that enhance the liberalized functioning of financial markets; for instance, promoting the integration of money markets, reviving the market for asset-backed securities, and advocating against a Financial Transaction Tax (FTT). Gabor and Ban (2016) chart a similar story in relation to the ECB’s ambition to grow and develop European repurchase markets, seeing the bank’s political support as driven by a desire to increase investor demand for European sovereign bonds.
Gabor (2016) and Kalaitzake (2017a) also provide significant evidence of ECB support for the financial sector on the issue of the FTT. With a particular focus on the political mobilization of private financial actors, it is shown how industry associations strategically targeted key central bank officials in an effort to recruit them as allies opposed to the charge. As a result, central bankers emerged as a decisive ‘veto player’ against the FTT, intervening at a critical moment in the policy process and registering authoritative concerns over the potential negative impact upon monetary policy transmission and market competitiveness (Kalaitzake, 2017a: 718–720). Furthermore, from a sociological perspective, Lebaron (2013) documents how ECB officials and its wider staff increasingly receive training from US-based academic institutions, re-enforcing ‘a monetarist vision of economics’ and emulation of the Anglo-American financial system – highly congruent with investor preferences – as the appropriate course of future integration (93–101).
While these studies are a welcome corrective to the scholarly gap on financial sector-central bank relations, there is considerable scope to further this strand of research and lay the groundwork for further investigation. The present paper goes about this task by providing a conceptual and empirical examination into the various ways through which financial actors and markets influence the policymaking activity of the ECB. In categorizing these mechanisms in the following sections, I employ a basic distinction between instrumental power – the strategic mobilization and political engagement of actors to directly influence policy outcomes – and structural power – properties of the economic order that bias policy outcomes and offer predetermined political advantages to finance (Fuchs and Lederer, 2008). This categorization addresses both the agential and structural aspects of financial political power, hence avoiding a common pitfall within the wider literature on business power of stressing one component over the other. Within each dimension of power, two of the most salient mechanisms relevant to central banking will be discussed in relation to the empirical policy activity of the ECB. Given space constraints, the empirical discussion is intended to be illustrative rather than exhaustive, providing a clear analytical framework for researchers to build upon: for instance, through conceptual refinement of the mechanisms and their interactions, the addition of new mechanisms, and further in-depth empirical investigation into the relationship between financial power and central bank policymaking.
Instrumental power and central banking
Closely associated with interest group politics, instrumental power emphasizes the study of microlevel interactions between public and private actors that impact upon the policymaking process and its outcomes. Key characteristics of this dimension of business power are strategy (the conscious and tactical intent of actors), resources (the deployment of money, information, organizational capacity, etc.) and direct influence (‘hands on’ policy engagement and the promotion of specific interests). Conventional examples of private influence in this domain include campaign financing and lobbying. Clearly, no central bank official has a need for campaign donations. Lobbying, however, is a crucial avenue for financial sector influence. While lobbying takes on different forms, there are two salient mechanisms that allow financial actors to potentially ‘capture’ central bank policy: namely, revolving doors and closed policy circles.
A key challenge lies in specifying the precise interests of any given actor within central bank policy debates. In this regard, it is important to acknowledge the increasing heterogeneity of the industry and a financial landscape populated by actors entangled within networks of interdependence and specialized activity (Arjaliès et al., 2017). To develop a nuanced and fine-grained picture of financial political power, then, researchers must pay attention to variables such as the market conditions in which different firms thrive, competing preferences on financial regulation, and the differential impact of macroeconomic policies. Specific characteristics of firms will be crucial in disaggregating interests and policy goals: large or small, risk adverse or risk orientated, geographic location, leverage position, trading interconnections, etc. Another particularly effective way of specifying financial actor objectives is through an increased focus on the instrumental activity of the wide variety of financial associations that represent various sub-sectors of the industry. These collective actors are usually explicit about their strategic goals and offer detailed reasoning behind their policy preferences. As such, for the purposes of clarifying conflicting political aims between industry sub-sectors, these organizations should be a central object of investigation.
Perhaps just as important is how central bankers view these actors, as officials will prioritize firm preferences they perceive as aligning with their financial stability mandate and offer privileged access to systemically important institutions. In this regard, large banks are clearly advantaged. Nevertheless, financialization requires central bankers to pay closer attention to non-traditional players, especially those operating within the burgeoning shadow banking sector. Particularly important entities include Special Purpose Vehicle corporations and money-market funds whose activities were critical in masking dangerous leverage ratios and liquidity vulnerabilities in the run up to the 2007/2008 financial crash (Doyle et al., 2016). Nevertheless, these actors remain salient in the provision of short-term wholesale funding and credit intermediation, prompting regulatory moves to monitor and gain transparency over their activities in the post crisis era. In turn, this has stimulated greater policy engagement on the part of representative financial associations – for instance, the Institutional Money Market Funds Association (IMMA) and the European Fund and Asset Management Association (EFAMA) – and facilitated increased political interaction with central bank officials (Mooney, 2015).
Mechanism 1: Revolving doors
Revolving doors involves participants from the private financial sector taking up positions of importance within the official sector, and vice versa. Given the technical nature of the modern finance, these public–private transitions are extremely common within the world of central banking. Many central bankers begin their career in the private sector, while it is common practise for firms to hire ex-central bankers as a means to establish closer links with governance networks and enhance their voice within policy debates. By some accounts, there is a positive and functional efficiency to revolving doors, as individuals with experience and expertise in complex financial matters utilize their knowledge to make rational public policy choices that benefit all of society (Moravcsik, 2002).
Nevertheless, it is reasonable to expect that private actors who travel to the official sector will generally hold more pro-market views on key issues such as inflation targeting, unemployment tolerance, regulatory restrictions, and similar policy options that have a distributional impact. Furthermore, policymakers coveting a profitable existence in the private sector once they retire from public service may seek a closer relationship with private firms during their time in office, potentially biasing their policy preferences (Jacobs and King, 2016: 19–21). Adolph’s (2013) ‘career theory of monetary policy’ provides evidence for these propositions: central bank officials with former private sector experience (career socialization) are shown to be considerably more anti-inflationary than former bureaucrats in their monetary policy positions. This policy stance also functions as an effective signal to future financial market employers (career incentives). These dynamics are particularly relevant to the ECB, as its extreme form of legal independence fosters an institutional tendency towards the cultivation of private sector relationships while systematically shirking public accountability to the European Parliament, Commission, and Council (Adolph, 2013: 314).
None of this automatically implies the regulatory capture of central bank policy by the financial sector. As in any policy domain, public officials and bureaucrats have the formal authority to dismiss the pleading of private actors whom they judge to be exaggerating claims or unduly pursuing narrow business interests. However, where revolving doors exist, researchers of political power must be especially alert to the prospect that officials are pre-disposed to conservative policy solutions and amenable to industry collaboration in tackling governance dilemmas, and test this accordingly with the empirical evidence. As noted by Adolph (2013), the revolving professional career track through which central bankers are socialized generates an ‘illusion of consensus’ over a restrictive range of what are considered ‘legitimate’ policy choices, and that consensus is commonly tilted in favour of private actors (19–20).
Mechanism 2: Closed policy circles
The mechanism of closed policy circles involves the creation of policy ‘insiders’ who are drawn from government, the state bureaucracy, and select interest groups from civil society. While tight-knit policy circles are, in principle, open to entry by any kind of civil society organization, it is widely acknowledged that corporate actors have a salient presence in such forums. In much of the business power literature, similar concepts are captured under various headings, including ‘sub-governments’, ‘iron triangles’, ‘advocacy coalitions’, ‘epistemic communities’ and ‘issue networks’ (e.g. Cerny, 2001; Haas, 1992; Jenkins-Smith and Sabatier, 1994).
As it relates to central banking, privileged access for finance tends to occur for several practical reasons. First, private financial actors hold important market information and data required by officials for more effective decision-making. Second, central bankers can gain policy acceptance from the financial community by taking on board the opinions of private representatives. Third, and perhaps most importantly, financial actors have crucial technical knowledge concerning the functioning of esoteric markets, products, and financial procedures, and are thus well-suited to advising central bank officials, and assisting them in calculating the likely impact of policy choices. All of these reasons are bolstered by the dominant trend of ‘scientization’ that characterizes contemporary central banking, and of which the ECB is a leading proponent (Marcussen, 2009). For instance, modern central banks prioritize clear communication and transparency vis-à-vis financial markets (e.g. forward guidance), while key policy decisions are premised upon highly specialized quantitative modelling techniques (e.g. credit risk measurements).
Once closed policy circles are formed, they are difficult to dislodge: financial actors develop consensus-building track records and garner trust; policymakers perceive efficiency benefits from dealing with the same group of individuals on a consistent basis; channels of mutual communication and interaction become firmly established (Tsingou, 2015). Such collaborative processes partially account for the enduring involvement of private sector elites within post crisis financial governance networks, and the resulting postponement, watering down, and/or abandonment of key regulatory reform initiatives (Moschella and Tsingou, 2013; Underhill, 2015). Hence, what is required is a deeper interrogation of the technical spaces and ‘fields of power’ that central bankers and private financial actors mutually inhabit and examine how their continuous interaction shapes the ‘social embeddedness’ of monetary and macroeconomic decisions’ (Lebaron, 2008: 121). Such analyses should avoid the bureaucratic-rational reductionism of economists, as well as the personal-psychological reductionism of journalistic commentary, in favour of a more sociological account aimed at diagnosing the power relations that take root within closed policy circles (Lebaron, 2008: 122–123).
Instrumental power and the ECB
Table 1 presents an overview of private sector involvement by individuals that have served on the Executive Board of the ECB – the bank’s most senior officials, responsible for implementing Euro-area monetary policy – since its establishment in June 1998. The Board stands out as the primary body focused upon the ‘European functions of the ECB’ and its members are internationally recognized as the public face of the bank’s policy agenda (Lebaron, 2013: 95). Out of the total nineteen members, fifteen have worked in the private financial sector either before taking up their position at the ECB, or after leaving. Given the fact that three of the four individuals without private sector experience are currently serving – and are statistically very likely to follow their colleagues career path after public office – the Executive Board is a critical locus of revolving door processes. Moreover, the private positions occupied by Board members have been overwhelmingly senior positions (i.e. president, vice-president, chairman, director, etc.) at major European financial firms, including Goldman Sachs, Morgan Stanley, Commerzbank, Banco Bilbao Vizcaya Argentaria, BNP Paribas, among others. Noteworthy also is that approximately half of those that worked in the private financial sector did so with more than one firm, while many of them also engaged in roles with non-financial sector private corporations.
Private sector engagement record of ECB Executive Committee members.
Source: European Central Bank and Bloomberg.
Table 1 also indicates the extent to which private elite organizations have secured the close involvement of Board members. In this regard, the Group of Thirty (G30) and the Institute of International Finance (IIF) are stand-out entities.
The IIF is the main lobbying body for large financial institutions operating on a global basis, and as such, explicitly works to pursue what is in the perceived best interests of their private members. Nevertheless, in offering collaborative support to official sector policymakers, the Institute stresses its unique capacity to promote financial sector stability on the basis of expert knowledge held by the senior individuals working with the organization. To this end, the IIF is highly selective in recruiting prominent former officials from the public sector, helping to establish their credibility within policy debates and secure access to prominent governance circles. ECB Executive Board members are a key component of this strategy with four of them (Noyer, Trichet, Asmussen, and Smaghi) serving on several IIF boards and working groups in recent years. This includes the important Group of Trustees of the Principles for Stable Capital Flows and Fair Debt Restructuring, which is a privately run initiative that establishes and maintains voluntary norms and market-orientated procedures in governing the conduct of creditor–debtor relationships. As trustees, group members operate as ‘guardians’ of this global, soft-law regime, and are tasked with reviewing the development and implementation of these debt management ‘Principles’ on an ongoing basis (IIF, 2013: 6; Ritter, 2010). This close participation was extremely relevant in the handling of the European sovereign debt crisis, as the IIF’s working relationship with leading ECB officials facilitated their extensive involvement in Greek debt restructuring negotiations throughout 2011–2012. Representing a critical moment in the crisis, the IIF wielded a disproportionate level of influence over the character of the final restructuring deal which was significantly skewed towards the interests of the private banking sector: e.g. upgraded legal protections, a direct cash-like pay out, a co-financing agreement to assure bond repayments (Kalaitzake, 2017b).
While being especially protective of banks, EU officials, with ECB backing, were noticeably more antagonistic to the interests of hedge funds. In making sure the 2012 restructuring deal would succeed, potential hold outs – primarily, risk-orientated, unregulated hedge funds – were side-lined from the negotiations. In addition, policymakers hastily approved a retrospective change to Greek law bonds in order to coerce these ‘vulture’ funds into accepting the restructuring terms agreed between the official sector and the IIF (Kalaitzake, 2017b: 404–408). Similarly, the ECB gave their formal support for a ban on the ‘naked’ short selling of credit default swaps, widely recognized as speculative trades by hedge funds throughout the Eurozone crisis. Nevertheless, reflecting the ECB’s broader commitment to the development of liberalized markets and light-touch regulation, the bank qualified its support by arguing that the ban should be a temporary measure to be used in ‘exceptional circumstances’ and supported the move towards a harmonized regime focused upon greater transparency and reporting procedures (Eurosystem, 2010).
The G30 is different from the IIF in that it does not expressly seek to champion corporate interests, even though it is a private body heavily funded by financial firms. Instead, the G30 projects a quasi-public mission to promote a deeper understanding of contemporary finance by bringing together a select group of (elite) individuals from the public and private sector, as well as academia. The key purpose of the group is to be an ‘ideational driver’ of what is deemed appropriate financial governance and to facilitate intellectual consensus on the best response to salient policy challenges. Invitation to join the club is considered an enormous privilege within the financial community and individuals report the high level of prestige, camaraderie, and professional satisfaction, that is derived from membership (Tsingou, 2015: 230–238).
As shown in Table 1, four Executive Board officials are/have been members of the G30, including the last two ECB Presidents. These ties indicate the tight professional correspondence between both organizations and which enable the regular attendance and speech-giving of other Executive Board members at recent G30 events (Canepa, 2017). Trichet is a longstanding senior member of the club, rising to the position of chairman upon leaving the ECB in 2011, and now acting as Honorary Chairman. The involvement of Mario Draghi dates back to 2006 and his ongoing role in the club while President of the ECB has been the subject of several ethical investigations by the European Ombudsman. The first of these investigations arose in 2012 on the back of a complaint by the lobbying watchdog, Corporate European Observatory (CEO), who claimed that Draghi’s membership was a threat to ECB independence and accountability. Citing the ECB Code of Conduct, Ethics Criteria for members of the Board, and staff rules, the group charged that Draghi failed to avoid the appearance of a conflict of interest by participating in G30 closed meetings, and ran afoul of the ‘arms-length principle’ in his relationship with private banks (including his former employer, Goldman Sachs) (European Ombudsman, 2012). As such, CEO requested that Draghi be told to withdraw from the private club. The initial verdict of the EU Ombudsman disagreed that membership of the G30 is incompatible with ECB independence, and hence, cleared the bank of all accusations. However, in light of the expansion of ECB supervisory powers under Banking Union, the matter was reviewed again between 2016 and 2018 by the new Ombudsman, Emily O’ Reilly. This time, the ECB was found guilty of ‘maladministration’ on several fronts and the Ombudsman recommended not only that Draghi suspend his membership of the G30 until the end of his term as ECB president, but that all future presidents and individuals on ECB decision-making bodies should refrain from being members (European Ombudsman, 2018).
On the question of transparency, the decision notes that four G30 members are senior figures from banks either directly or indirectly supervised by the ECB (Santander, Bayerische Landesbank, Credit Suisse, and UBS). While having no objection in principle to ECB interaction with private sector actors, the Ombudsman does consider the ‘secrecy’ surrounding G30 meetings and operations to be inappropriate: the G30 do not publicize agendas, participant lists, and summaries of member-only meetings – practices that are out of line with ECB transparency obligations. On the issue of appearances, the Ombudsman underlined a heightened public expectation of ECB ethical conduct and accountability due to the significant decrease in popular confidence in all EU institutions after the financial crisis. In this context, it is repeatedly stated that it is not only the effective influence of private actors that matters, but also the perception of private influence which should be guarded against. It is on this specific matter of perception that the Ombudsman premised the key charge of maladministration, arguing that G30 membership ‘necessarily implies a closer relationship’ compared with non-member participation, and conveys a sense of ‘informal relations…which can seem not appropriate between a regulator and the regulated’.
While this is a valid judgement from a bureaucratic point of view, it is incomplete in terms of an academic analysis of policymaking influence. The difficulty is that the decision accedes to the functional efficiency principle of ECB engagement with the private sector (as long as the perception of influence remains absent) while ignoring the arguably more important matter of disproportionate representation. Within both inquiries, the ECB claimed not only that participation in such fora is necessary to facilitate intelligence-gathering, but that it is in fact a legal responsibility under EU law: the bank cites Article 11(2) of the Treaty on European Union which states that EU institutions must ‘maintain an open, transparent and regular dialogue with representative associations and civil society’. Ostensibly, this is a sound defence by the ECB and one that is accepted by both Ombudsmen. Ironically, however, it was the exculpatory finding of the 2012 decision which noted a crucial caveat, namely, that ‘open dialogue with civil society also implies that the dialogue should be balanced, affording diverse interlocutors an appropriate opportunity to debate issues of relevance to the work of the ECB’ and that ‘efforts should be made to discuss the work of the ECB in diverse fora [my italics]’ (European Ombudsman, 2012). It is on this critical score of ‘diverse representation’ that ECB activities are found wanting, and which is an essential gauge of unequal political influence for scholars of financial power (Nölke and Perry, 2007: 13–14).
It is clear from a broad assessment of event meetings, network connections, and professional interactions, that ECB members maintain almost exclusive linkages to private actors, over and above engagement with other civil society concerns. For instance, Executive Board diaries – published due to revelations that top ECB officials habitually spoke to market participants in the run-up to monetary policy decisions (Jones, 2015) – show consistent and regular contact with major financial firms, and their lobbying associations, by every member of the Executive Board. 1 As an illustrative sample, for the first three months of 2017, Mario Draghi was scheduled to meet with Bank of America, Merrill Lynch, UBS, AXA, Morgan Stanley, Intesa Sanpaolo, Cassa Depositi e Prestiti, the Japanese Bankers Association, the French Banking Federation, and the Association of German Banks. While there are also regular meetings with several EU agencies, central bank and other political officials, and occasional media and academic engagements, there is not a single interaction with public interest NGO’s, consumer groups, trade unions, etc. During the same time period, the Vice President Vítor Constâncio met with BNP Paribas, JP Morgan, the Spanish Banking Association, the Hellenic Bank Association, and the Bank of Tokyo-Mitsubishi UFJ – also without corresponding civil society engagement (see also Braun, 2017: 34–36).
These patterns are reflective of a wider and institutionally entrenched assemblage of ECB–financial sector interactions. Throughout the entire gamut of policy areas relevant to ECB jurisdiction, there exists a complex web of advisory groups that is dominated by private financial actors. Such groups are populated through direct invitation by the ECB with the purpose of maintaining ‘active dialogue with market participants’ which ranges from highly technical matters such as the TARGET2 payment infrastructure and Distributed Ledger Technology, to more salient policy issues discussed by the Macroprudential and Financial Stability contact group and the Banking Industry Dialogue Forum. 2 Also of particular note is the Institutional Investor Dialogue which brings together ECB Governing Council Members and representatives from the major global asset management firms (e.g. Blackrock, Aviva, AXA, Allianz SE) to regularly discuss the conduct and effects of the central bank’s asset purchase programme (the key instrument of contemporary monetary policy). 3 The ECB is entirely open and transparent about the content and attendance of these meetings through the publication of participant lists, agendas, and minutes. Once again, extensive interaction is justified on the basis of facilitating efficient governance, while the matter of diverse representation is disregarded: out of the 22 active advisory groups, 508 out of 517 available seats (98%) are occupied by private financial actors, with representatives from the largest European banks (Deutsche Bank, BNP, Société Generale, and UniCredit) taking up approximately half of the total seats (Harr, 2017: 7). To the extent that these advisory groups have any influence at all on policy, this major imbalance of representation is likely to be a key variable in skewing outcomes in favour of financial actors.
Structural power and central banking
Structural power shifts focus towards broader systemic properties of the politico-economic configuration in question and the power relations that are fundamental to its regular operations. Since the crisis, there has been a renewed inquiry into the sources of financial structural power because of the desire to understand root causes of the collapse, the trajectory of imminent economic restructuring, and key drivers of socio-political inequalities. While multiple processes feed into the exercise of financial structural power, two mechanisms in particular are acknowledged as playing a key role in sustaining the industry’s leverage over policy outcomes, namely, the phenomena of capital flight/disinvestment and the rise of financial institutions that are Too Big to Fail (TBTF) (Bell and Hindmoor, 2015; Culpepper, 2015). As this section will demonstrate, both phenomena heavily impacted upon the specific design of post crisis policymaking by the ECB.
In conceptualizing structural power, it is important to emphasize the ‘reciprocal dependencies’ that exist between the state and finance (Culpepper, 2015: 407). This can be seen in how the state-finance relationship is moulded by evolutionary changes within the industry, and in particular, how central bankers often leverage newly emerging financial innovations/practises in the pursuit of regulatory aims. For example, one of the most important recent developments within Europe is the steady move towards a market-based financial system, and in particular, the role of sovereign European bonds in enabling this process (Gabor, 2016). Crucially, state actors are not passive agents in this restructuring but often work to promote and facilitate these changes in various ways. Hence, within a broader liberalization and integration agenda, ECB agency has been central to the expansion of repo markets, securities trading, and the policing of sovereign debt collateral eligibility by credit rating agencies (Gabor and Ban, 2016; Orphanides, 2018). In this sense, central bankers often actively contribute to features of the financial system that emerge as structural constraints in a time of crisis and encourages them to closely align with financial sector preferences in their policy choices. Of course, as the state is ultimately responsible for overall macroeconomic stability, it can never be wholly subjugated to the structural power of financial markets. This was demonstrated clearly in 2007/2008 when EU states (with central bank support) intervened decisively to rescue the banking system from total collapse, throwing into sharp relief the essential co-dependency between financial markets and state authority.
The Eurozone troubles forced EU authorities to reprise this crisis management role. However, the idiosyncratic design of the Eurozone polity presented complex constraints on policymakers, especially in relation to the stabilization of financial markets, and determined a pivotal role for the ECB in resolving the crisis. Important to underline is the fact that, while ECB actions were strongly influenced by pressures emanating from the financial sector, these pressures were not directed through any conscious political intent on the part of specific financial actors; rather, financial sector influence was transmitted through the collective, aggregate decision-making of investors within a highly uncertain market environment. It is this characteristic mode of causal influence that perhaps best distinguishes structural from instrumental forms of power.
Mechanism 3: Capital flight/disinvestment
Capital flight/disinvestment is a salient mechanism of structural power in the post Bretton Woods era of abandoned capital controls and footloose financial flows. As financial actors have an abundance of investment opportunities, while public officials remain largely rooted to nation-state boundaries, the latter are under continuous pressure to compete for, and provide incentives to attract, scarce capital (Cerny, 1997). In the context of developing countries, traditional capital flight regularly functions through disinvestment of a nation’s assets (e.g. government bonds, corporate stocks, etc.) and, in particular, placing severe downward pressure on foreign currencies. This makes it extremely difficult for developing countries to repay external debt and compels their policymakers to introduce harsh austerity/readjustment programmes to restore investor confidence.
In the context of the Eurozone crisis, these disinvestment dynamics expressed themselves in unique ways corresponding to the peculiar architecture of EMU. The principal expression occurred through bond markets with a severe drop in demand for (and selling off of) periphery bonds and a corresponding flight to safety/quality into, typically, German bonds (IMF, 2012). The consequence was a sharp divergence in interest rates between Euro member states and severe funding constraints for periphery governments caught in the crosshairs of financial panic. A second form of capital flight was manifest through banking runs and the shifting of deposits from periphery banks to those in the core. These financial movements were a source of constant market pressure, with varying peaks and troughs throughout the crisis, and were a function of currency redenomination fears among foreign (and in some case, domestic) savers in the event of a Eurozone breakup (Whelan, 2017: 9). A third route of capital disinvestment was channelled through the restriction of interbank loans offered to periphery banks. This situation had manifest on a global scale in 2007 as the sub-prime crash evaporated trust among participants within short-term funding markets over the quality of mortgage-related securities, requiring central banks to step in as a ‘market maker/dealer’ of last resort’ to restore liquidity (Buiter, 2008: 107–113; Mehrling, 2010). While these measures succeeded at unfreezing credit flows in general, the emergence of the Eurozone crisis meant that periphery banks remained locked out of interbank trading.
In responding to these distinct pressures, the ECB stood at the centre of policymaking as the sole authority equipped with a range of conventional and unconventional policy tools to intervene and prevent a downward spiral of ‘bad equilibrium’ (De Grauwe, 2013: 520–522).
Mechanism 4: Too Big to Fail
Financial firms deemed TBTF enjoy unique political and economic protections due to their systemic importance for prosperous economic functioning. Because financial institutions – in particular, banks – have grown disproportionately in size over the last three decades, and have become thoroughly interconnected with different markets, firms, and countries, letting these institutions go bust is a high-risk strategy that few political leaders will countenance. Hence, throughout the crisis, these firms were consistently bailed out and recapitalized with public money, while implicit state guarantees sustained artificially high share prices and lower borrowing costs. The notable exception of Lehman Brothers is an event that proves the rule, as the firm’s collapse sent shockwaves throughout the global economy and made governments highly adverse to future failures.
The TBTF dilemma is particularly acute in the EU for a variety of reasons. First, at a national level, banking markets are characterized by a high degree of concentration among a handful of firms. Second, banking institutions are responsible for providing a much higher percentage of credit to the economy within Europe compared to a country such as the US. Third, large national banks retain strong commercial and political ties to domestic firms and bureaucratic/governmental actors, and thus, there is very little appetite to see ‘national champions’ fall or become competitively disadvantaged (Goldstein and Véron, 2011). As such, TBTF constituted a major policy challenge for national governments and leading supranational bodies such as the ECB throughout the Eurozone crisis.
A chief predicament revolved around tackling the clear ‘moral hazard’ of TBTF firms, while simultaneously maintaining financial stability and wider economic growth. However, as guardian of the currency, the ECB had a particularly strong interest in preserving both the credibility of the euro as a reserve currency and its own reputation as a responsible central bank in the eyes of investors. In this regard, the ECB disproportionately focused upon insulating TBTF firms from contagion risks stemming from periphery member states, while largely ignoring the dysfunctional consequences that this caused in terms of public–private burden-sharing, financial risk-taking, and public anger. Furthermore, as demonstrated below, the bank pursued its objectives through a series of opaque and highly politicized actions, and the overstepping of its legal mandate.
Structural power and the ECB
At the early stages of the Eurozone crisis, Kenneth Dyson noted that the relative strengthening of ECB power over the previous decade of European integration ‘has been dwarfed by the growth of the structural power of the global financial markets, in relation to which central banks have been spectators rather than independently active regulatory players’ (Dyson, 2009: 10). As a result, the ECB has had to balance working with financial markets, while trying to avoid being captured by them. The full-blown outbreak of the Eurozone crisis in late 2009 pushed this balancing act to the limit, and across a variety of high profile policy issues, there is significant evidence that ECB actions were inordinately influenced by swings in financial market sentiment and the precarious condition of systemically vital banks.
The clearest example of this is how the ECB acted as a vocal opponent of imposing losses on private creditors, both in the context of bondholder exposures to states and their exposures to ailing banks. The cases of Greece and Ireland – two of the first countries to receive EU financial assistance – illustrate both sides of this policy. As revealed through the Irish national banking inquiry, as well as the release of privately sent ECB letters, Trichet forcefully argued that to impose private losses on international investors would be a huge mistake and put considerable pressure on successive Irish finance ministers to avoid this course of action (Doyle et al., 2016). This took place initially in 2010, when the Irish government made the catastrophic decision to give a blanket guarantee of €440 billion (237% of GDP) to their entire banking industry. Then, in 2011, as the new Fine Gael government was announcing their austerity budget (and after running for election with a pledge to bail-in private creditors), Trichet made a dramatic last-minute intervention to dissuade Finance Minister Michael Noonan from burning bondholders. Trichet argued aggressively that ‘a bomb would go off in Dublin, not in Frankfurt’ and that the consequences for the Irish state might result in the ECB not being able to continue their provision of Emergency Liquidity Assistance (Banking Inquiry Joint Committee, 2016: 17; 366–367).
Trichet was also the leading proponent against a restructuring of debt in Greece, while other members of the Executive Board such as Jürgen Stark and Lorenzo Smaghi publicly declared their hostility to even the mildest forms of private sector involvement (Reuters, 2011). As late as summer 2011, the ECB argued vehemently against the proposition of a ‘soft re-profiling’ of debt, with Trichet walking out of a top-level meeting with Eurozone leaders, and refusing to discuss the matter further. ECB objections were only overcome when virtually all other parties involved in the negotiations (including France, Germany, the Commission, and under pressure from the IMF) decided that some form of ‘voluntary’ writedown was inescapable, later resulting in the 2012 Greek restructuring deal. Notably, during this period of ECB intransigence, the use of European Financial Stability Facility funds to pay off maturing Greek bonds up front and on time was a huge win for the largest (i.e. TBTF) European banks that were most exposed to Greek debt. The policy of delaying the restructuring deal ultimately facilitated the migration of approximately €100 billion euros of private debt onto public balance sheets from 2010 to 2012 and was partially accounted for by ECB emergency bond purchases in the secondary markets (Kalaitzake, 2017b: 396–398).
The underlying motivations for the policy of avoiding creditor losses were premised clearly upon the mechanisms of capital flight/disinvestment and the TBTF dilemma. First and foremost, the ECB feared that any form of default by a struggling Eurozone country would establish an irreversible precedent that would spook financial markets and lead to an escalating wave of panic and capital flight. The example of one country burning bondholders (and its obvious popular appeal) would very likely be copied by other governments under financial pressure, thus eradicating investor confidence and threatening the entire Eurozone construction (Buchheit and Gulati, 2013: 55). Second, given that systemically important European banks were the primary holders of this debt – responsible for more than €1.5 trillion, or approximately 75%, of all lending to periphery economies – any imposition of private losses would further threaten the solvency of a highly vulnerable and unstable European banking system (Jenkins et al., 2010). For ECB officials, the catastrophic impact of the Lehman collapse functioned as the worst-case scenario to avoid, particularly in the context of a highly interconnected EU banking system, where the effects of contagion would be virtually impossible to stem.
ECB officials explicitly invoked the structural stability of the financial system as justification for their position on protecting bondholders. In responding to the press on his political interventions to avoid a private sector writedown by Irish officials, Trichet stressed the overriding importance for governments to ‘consider the confidence of the market…[and] do everything that improves the confidence of the savers, the investors and the market participants’ (Trichet, 2011: 3). Smaghi (2011) also gave a high-profile speech arguing that a debt default on creditors would be ‘political suicide’ and advising countries to avoid the ‘aim of punishing (or rewarding) certain categories of investors, rather than considering the ultimate consequences for the people’.
The consistent advocacy that creditors be reimbursed for poor investments operated in tension with the ECB’s equivocal stance on acting as a lender of last resort for crisis-ridden states in the periphery. The ECB justified its reluctance to defend these countries against market speculation by invoking the charge of moral hazard, claiming that any prolonged form of monetary intervention would allow governments to backslide on commitments to austerity and structural reforms. Given the uneven history of implementing EU reforms, this concern was neither new, nor unreasonable. However, the key issue is the highly selective – and ultimately, politicized – deployment of monetary tools by the ECB to assist states in contrast to the use of these tools to aid financial institutions.
Given the existential nature of the crisis, the ECB did not have the option of idly standing by in the face of mounting capital flight from periphery bonds. Hence, at various points, the bank intervened to suppress interest rates for state financing and ease liquidity and collateral requirements for specific national banking systems. Nevertheless, this assistance could only be relied upon on a temporary basis and was explicitly tied to progress on fiscal retrenchment and the proactive implementation of reforms. For instance, in the face of severe doubt over austerity commitments by Italy, the ECB intentionally withheld Securities Markets Programme purchases for that country’s bonds, while maintaining their purchasing of Spanish bonds (Henning, 2016: 187–188). This action amplified a rapidly deteriorating economic and political situation within Italy, leading directly to the collapse of the Berlusconi government and the installation of ECB favourite, Mario Monti. The ECB was also accused of overstepping its mandate by using the provision of Emergency Liquidity Assistance as negotiating leverage in order to extract political concessions from countries facing banking runs, e.g. Ireland in 2010, and Greece in 2015 (Whelan, 2015: 37–56).
When Draghi eventually declared to do ‘whatever it takes’ to protect the Euro in mid-2012, the immediate effectiveness of the policy in warding off market speculation raised uncomfortable questions about why the ECB had waited so long to act, as advocated by high-profile scholars and commentators (De Grauwe, 2011; Wolf, 2011). Furthermore, the resulting Outright Monetary Transactions (OMT) programme placed strong stipulations on the adherence to, and monitoring of, country-specific conditionality. Undoubtedly, implicit backing from German officials was a crucial factor allowing the ECB to make its commitment and finally stem European capital flight/disinvestment (Matthijs, 2016: 387). However, a related precondition was the introduction of a variety of ‘crisis-constitutionalist’ reforms that would bolster the Stability and Growth pact, locking countries into reform measures and providing assurances to financial markets (Bieling, 2014: 354–355; Spiegel, 2014). In this regard, the passage of the Six-Pack regulations and the European Fiscal Compact in late 2011/early 2012, highlighted the importance of political timing in Draghi’s decisive intervention. These measures – enhancing national budget scrutiny, facilitating economic policy surveillance, limiting fiscal expansion – essentially amount to the transmission of orthodox macroeconomic governance norms expected by investors into legislative obligations, and are thus purpose-built to mitigate structural pressures emanating from financial markets.
The ECB’s hesitant support to states stands in stark contrast to the extensive use of unconventional measures deployed to support the financial system, often resulting in highly unequal distributional consequences. For instance, the ECB’s early use of ‘full-allotment refinancing’ and expansion in eligible collateral underwrote a regularly functioning interbank system for most core European banks throughout the crisis. However, for periphery banks, refinancing through ECB liquidity effectively functioned to replace private sector interbank flows coming from core financial institutions until the sudden stop of 2007 and subsequent funding pressures throughout 2009–2012 (IMF, 2012: 4). This raised several questions regarding the fair distribution of risk between the public and private sector. First, as a result of the TARGET2 system – used for settling inter-member state euro payments – core private banks now held significantly safer claims against their national central banks (and, ultimately, the ECB) rather than stressed private borrowers in the periphery (Dullien and Schieritz, 2012). Second, the ECB’s filtering of ‘quasi-fiscal subsidies’ through the periphery banking system constituted a highly non-transparent way of managing public exposures (Buiter et al., 2011: 13). Finally, the fact that periphery banks accessed ECB refinancing through the use of domestic sovereign collateral actually served to exacerbate the sovereign-banking ‘doom-loop’, thus contributing to increasing ‘balkanization’ of the currency area.
Besides this, two bouts of three-year Longer Term Refinancing Operations (LTRO) at the crisis peak in 2011/2012, and further ‘Targeted’ LTRO’s in 2014 and 2016, delivered essentially unlimited access to liquidity for all European credit institutions at extremely low interest rates. European banks used this cheap money as part of a highly profitable ‘carry trade’ by reinvesting borrowings from the ECB into higher-yielding (higher-risk) sovereign bonds. This not only facilitated larger trading profits, but it also gave banks the opportunity to reduce their capital requirements due to the traditional ‘safety’ tag associated with these assets under Basel rules (Thompson and Jenkins, 2013). The result is that many European banks have been incentivized to ignore non-performing ‘legacy’ loans, while receiving a much-needed boost to profit levels. The moral hazard created by this policy has contributed to further moral hazard in the form of the persistent TBTF dilemma. According to the 2014 IMF Financial Stability Report, concentration in the banking sector of many European countries increased in the post crisis era, while implicit public subsidies were ‘much higher than before the crisis for [the] euro area’ – ranging anywhere between $90–300 billion dollars per year depending on the estimate used (IMF, 2014: 104–105; 114).
As the crisis gradually subsided in the aftermath of Draghi’s announcement, EU officials and the ECB turned their attention to long-term policy options that would help to tackle similar outbreaks of financial panic in the future. One such measure has been the establishment of Banking Union, allowing for direct supervision by the ECB of 122 Euro-area banks (approximately 80% of all banking assets). While this represents a positive step towards mitigating some of the risks from banks that are TBTF, the lack of agreement on a regional Deposit Guarantee Scheme, as well as the withdrawal of plans to implement structural banking reforms, means that effective supranational regulatory efforts still have a long way to go.
However, another headline measure, the drive for a Capital Markets Union (CMU), is a considerably more ambiguous step concerning the structural power of finance. The policy has been framed by ECB officials as a means to solve problems arising from institutional deficiencies in the EMU architecture. The logic behind this lies in the hope that ‘private risk sharing’ mechanisms within a US-style market-based financial system – e.g. increased cross-border risk diversification, lower home biases, more integrated credit markets, federal enforcement of investor protections – will operate as a functional substitute for the lack of centralized fiscal transfers within the EU (Braun and Hübner, 2018: 11–13). Irrespective of the questionable claim that CMU will adequately replace true fiscal stabilization mechanisms, to the extent that the policy rehabilitates a market for securitization through ‘STS’ (simple, transparent, and standardized) criteria and deepens European firms’ dependence on capital market funding, it constitutes a substantial shift in structural influence towards shadow banking entities and their activities (Braun et al., 2018; Engelen and Glasmacher, 2018). Similarly, the latest effort by European authorities to ‘engineer’ a single safe asset through the creation of Sovereign Bond-Backed Securities 4 (SSBS) will only tighten the reciprocal dependencies between private and state actors in a financial sector that is increasing organized around collateralized lending and borrowing (Gabor and Vestergaard, 2018).
Conclusion
Focusing on the ECB, this paper has made the case for the importance of a more sustained analysis of the power relationship between central banks and the financial sector. In doing so, the paper outlined key mechanisms through which the financial sector can exercise significant influence over ECB policy behaviour, and in turn, solidify its prominent position in contemporary society. Revolving doors, closed policy circles, capital flight/disinvestment, and the TBTF phenomenon, are all salient mechanisms that allow financial actors disproportionate representation within policy debates and predispose central bank officials to side with private interests on questions of major distributional consequence.
While these mechanisms are likely to feature in most empirical studies of central bank policy battles, the paper does not suggest that they exhaust the various channels through which financial actors transmit influence. Much like the wider business power literature, scholars of financial political power should work to identify other mechanisms of influence that shape the power relations between the financial sector and central banks. A major candidate for future investigation might be forms of ideational influence, which occupy a conceptual space that does not fit neatly into structural or instrumental power but might be considered discursive power (Fuchs and Lederer, 2008: 8). Such investigations would offer further insight into the agenda-setting potential of the financial sector through particular framing tactics. In the context of post crisis EU governance, for instance, discursive institutionalist scholars have interrogated how norms of liberal governance have retained their ideological prominence through the marginalization of alternative policy solutions and the flexible interpretation of rules to suit elite strategic objectives (Mügge, 2013; Schmidt, 2016).
Another line of inquiry could examine the influence of financial performativity, analysing how the ever-expanding technical practises of the financial industry potentially constrain policymaker choices, while offering novel pro-market and financialized solutions to public goods provision (Fastenrath et al., 2017). As central bankers rely on innovative financial technologies to pursue monetary and regulatory objectives, their reflexive understanding of how financial markets function will have significant political import (Stellinga and Mügge, 2017). Similarly, as market-based financial systems take deeper root, researchers should examine how central bankers are responding to the new demands placed upon them to stabilize markets and the implications of this for financial structural power. As noted by Gabor (2016), there is a growing consensus among leading central banks that they must go beyond their traditional responsibility of providing lender of last resort facilities to systemic banking institutions and adopt tools that are geared towards ensuring the maintenance of liquidity flows in vital collateral markets (971).
Above all, scholars have to demonstrate the manifestation of these mechanisms through deeper empirical investigation across a number of policy areas. In this regard, process tracing case studies – supplemented, where possible, with elite interviewing – are likely to be the most effective methods for gaining traction on various forms of influence, given their attention to the fine-grained details of the policymaking process, the temporal context in which decisions are made, and the core motivations underlying those choices (Woll, 2007: 74).
With the elevated status of central banks in the post crisis era, there is little shortage of material for scholars to investigate, particularly as it relates to the ECB. Two examples are readily apparent. The first concerns the growing network of advisory groups that have a direct line of contact with the ECB and, as discussed previously, are overwhelmingly occupied by private financial actors. To date, there exists no academic investigation into the precise make-up of these forums, how they are established, how participants interact, what both public and private actors think of them, and what kind of impact they have (if any) on the wide range of topics under discussion. 5 The second concerns the increased involvement of the ECB in financial regulatory matters, as well as their salient role in shaping the character of future European integration – especially, the drive for CMU. As is clear from investigations of the FTT initiative, the ECB was a major veto player in blocking the taxation charge, deploying arguments that were highly congruent with those made by financial associations. Yet, this is not the only policy that the ECB has spoken out about: high frequency trading, money market regulations, and restrictions on internal risk modelling are all regulatory measures on which the ECB has struck a conservative note (Bowman, 2017; Canepa, 2016; ECB, 2014). Armed with the conceptual tools to identify multiple routes of private influence, detailed analyses into the bank’s positioning on these and similar proposals will significantly improve our understanding of the power dynamics underlying the financial sector–ECB relationship.
Footnotes
Acknowledgements
The author wishes to thank Robert Sweeney, Kathleen Lynch, Benjamin Braun, and two anonymous reviewers for their assistance with this article.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The author wishes to acknowledge financial support from the University College Dublin Seed Funding Scheme, which assisted in promoting this research.