Simon Wren Lewis and Frances Coppola have written two thoughtful pieces about Irish central bank Governor Philip Lane’s public comments about Irish tax policy.
My own view is that he should not be making these remarks.
The reason has to do with the effect that making them will have on the presumed nature of the office and the incumbent holder in the future.
If it becomes normal for central bank governors to comment on matters other than monetary and financial policy, there is a risk that governments will seek to vet future candidates for their other policy views, and not appoint primarily on the basis of monetary and financial policy expertise. And that future candidates will invest time and energy competing on the basis of political acceptability, rather than their skills operating the central bank policy levers.
The expectation that this will happen will feed back into monetary policy, undermining the original purpose of central bank independence, that there were benefits to be had by creating the impression, and following through on it, that monetary and financial policy would not be continually readjusted to suit political imperatives.
In the Eurozone, the scope for national central banks to bend to national governments’ views is limited by the fact of their vote being diluted on the ECB Governing Council. But that effect is not zero. And other central bank governors may be emboldened by Lane’s remarks.
Obviously, in the real world, one must presume that a certain amount of politicking goes on in selecting Governors and courting Governor jobs. But this is limited by the precedent of generally not speaking out, and the priority such considerations are accorded would increase if the precedent was routinely broken.
These worries are not mere niceties.
Right wing comment in the UK press has often featured the presumption that Mark Carney was selected in part because of his shared political world view with George Osborne and David Cameron, a presumption that was unfortunately fed by Carney himself repeatedly speaking on topics off his patch in a way that they would have approved [on diversity, climate change, the benefits of EU membership, and so on].
Going a little further back, one can speculate that the need to find a governor of the right sort was underlined by Mervyn King’s comments in 2010 on what prudent fiscal policy required at the height of the UK’s financial crisis.