CEE central banks under siege

Turkey’s president took advantage of a trip to London in May to respond to investor concerns about his country’s collapsing currency by promising to wrest control of monetary policy from the central bank. 

While deplorable, this is hardly surprising. Recep Tayyip Erdogan has repeatedly demonstrated his determination to get his hands on every lever of power in Turkey. It was never likely that the central bank would escape unscathed, particularly given Erdogan’s apparently unshakable belief that raising interest rates boosts inflation. 

What is perhaps surprising is to find similar concerns over central bank independence being raised in a country much closer to the heart of Europe. 

For most of Romania’s post-communist history, its central bank has been one of the country’s most respected institutions – and with good reason. Under the steady stewardship of long-serving governor Mugur Isarescu, it has been an anchor of stability during the slow and often painful transition to capitalism and EU membership.

Recently, however, the National Bank of Romania (BNR) has come under increasing attack by politicians from the ruling Social Democratic Party (PSD). 

Since the start of this year the party’s powerful leader, Liviu Dragnea, has accused the central bank of trying to strangle growth, conspiring with opposition politicians to discredit the government and spreading “fake news” about the economy. 

He has also attributed rising inflation to central bank mismanagement and a conspiracy by multinational companies – rather than the PSD’s loose fiscal policy. And, for good measure, he has hinted that unspecified “external forces” are working to prevent Romania achieving its potential. 

Such rhetoric is disturbingly familiar. At the start of the decade, when Viktor Orban’s Fidesz party came to power in neighbouring Hungary and began its capture of state institutions, one of its first targets was the central bank. 

Propaganda campaign

A vigorous and often vicious propaganda campaign was waged against the bank and its respected governor, Andras Simor. Independently minded deputy governors were replaced with Fidesz loyalists. In 2013, key Orban ally Gyorgy Matolcsy was installed as governor. 

Under his leadership the central bank has pursued a growth-at-all-costs policy that may yet come back to bite Hungary, while at the same time funnelling money to shady foundations linked to Fidesz cronies. 

The fear is that PSD politicians are looking to replicate the Hungarian model in Romania. 

Dragnea has already stated publicly that central bank policy should only be made in conjunction with the government. While Isarescu is in post, there is little chance of that. The veteran governor is not only a ferocious champion of central bank independence but also one of the most respected policymakers in Romania. 

Time, however, is on PSD’s side. When his latest term as governor ends next year, Isarescu is expected to step down. That could give Dragnea the chance to push for a political appointment. Indeed, some see the recent anti-BNR rhetoric as opening shots in a coming battle for control of the central bank. 

If that is the plan, PSD politicians would do well to take note of recent events in Turkey. Erdogan’s intervention in May caused the lira to fall still further and brought a step closer the possibility of a catastrophic outflow of foreign funds from Turkey. 

Independent central banks may not always do the right thing, and central bank independence is no guarantee of economic health. But in the long run, it will always be a safer bet than the alternative.