Restatement of Independence. The Eurosystem

After the fall of the Bretton Woods system and the unsuccessful attempt to achieve price stability through monetary quantitative targets, the lack of any monetary anchor makes the central bank’s discretion all the more important. This happens in an environment of fiscal prudence and of tendentially balanced budgets. Monetary policy appears as “the only game in town”, almost by default, with increased responsibility and risks in case of errors, either in terms of high inflation or of an economic downturn. Inflation targeting matures in this environment, together with the recognition that only an independent central bank can appropriately pursue price and financial stability. The vision of the central bank as independent within the government (that goes back to the post-war period) is not neglected and the specific inflation target may be decided, as in the United Kingdom, by the Treasury, so that we can speak of an “operational” independence because the central bank operations have to be carried out according to the country’s general economic policy. Meaningfully, however, the prohibition of monetary financing of the Treasury is introduced. The years at the turn of the past and the present century are generally and apparently benign. In the newborn Eurosystem, however, the single currency operates in a context of lacking convergence of the economic conditions of member countries.