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Éric Monnet, La Banque-providence. Démocratiser les banques centrales et la monnaie

Clément Fontan
p. 139-142
Référence(s) :

Éric Monnet, La Banque-providence. Démocratiser les banques centrales et la monnaie, Paris : Le Seuil, 2022, 128 pages, 978-202148625-4

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1In response to the global financial crisis, central banks grew, once again, into what experts dubbed “the only game in town” in macroeconomic policy. The policy response to COVID-19 has cemented further the key role that monetary policy plays today in our economies. This new role has put into question the thirty years consensus view on central banks as neutral technocratic institutions and has gave birth to new academic debates and controversies. Eric Monnet is an important participant in these new debates thanks to both his academic research on central banking history and his numerous op-eds and policy papers on current central banking issues. In this short essay (106 pages), Monnet articulates these two facets to put forward a set of propositions aiming at democratizing central banks. The first chapter of the book aims at conceptualizing the links between central banks and regulatory states. The second chapter focuses on the issue of money creation and the role played by sovereign debt. The third chapter summarizes the contemporary challenges facing central banks, from the purchases of sovereign debt to cryptocurrencies. The fourth chapter outlines Monnet’s proposals to (re)democratize central banks.

2Monnet’s argument starts with a reminder: contemporary central banks are heirs of the regulatory apparatus that were implemented by States to finance their welfare regimes from the aftermath of the Second World War onwards (17-18). They were never completely isolated from democratic processes in the sense that their independence from political authorities is not a black and white issue; rather, it necessary comes in degrees. In this first chapter, the most innovative aspect of Monnet’s historical account is to link the evolution of central banks with the financing needs of welfare States rather than with the birth of nation States or financial crises.

3This conceptualization allows him to highlight the insurance role that central banks play in our democracies as part of the collective political effort to “decommodify” the economy (20-22). More precisely, Monnet argues that the monetary system is a public good and central banks guarantee the relative stability of the value of money and its universal accessibility. Central banks pursue this objective through “ambiguous” interventions on the credit markets (23-24). On the one hand, in crisis times, they substitute for markets in order to avoid financial meltdowns. On the other hand, in “normal times”, they create and organize markets to ensure their smooth operating and the transmission of their monetary policy. Then, in chapter 2, Monnet explains how central banks create money and operate between markets and states by swapping safe assets, mostly sovereign debt, against banks reserves (35-47). The policy upshot of this analysis is that what we ask from central banks should be aligned with the respective weight we want to give to market mechanisms and public interventions in our economies.

4In chapter 3 Monnet applies this conceptual framework on a range of contemporary issues faced by central banks. To face the succession of financial crises since 2007, central banks had to move away from the so-called Central Bank Independence (CBI) template, which had spread like wildfire since the early 1990’s, and started to implement unconventional policy measures, in particular large purchases of public debts on the secondary markets. Monnet highlights an interesting paradox: while central banks’ independence from political authorities is at an all-time high, their purchases of public debt are higher than when their official mandate was to manage this public debt (53). Central banks broke other taboos that were attached to the CBI template. For example, they started to offer long-term loans to the banking system and, later on, attached conditions to force the banks to pass this liquidity to the real economy. Finally, Monnet claims that central banks face new challenges with the issue of swap lines between central banks as well as the rising popularity of digital currencies, such as Bitcoin, which could undermine their control over the payment systems. In reaction to the latter issue, central banks could implement their own digital currencies, which would mean that citizens and firms could have their own account at their central banks.

5The book last chapter (77-104) focuses on implications for democracy of the new role played by central banks in our economies. Monnet argues that to maintain legitimacy, central banks must strengthen their processes of deliberation and reflexivity with elected authorities (83). Then, he details how such processes could be implemented in the case of the euro area. Monnet underlines first how the “monetary dialog”—the main accountability procedure between the European Central Bank and the European Parliament—is biased in favor of the former. Instead, he suggests creating a “European credit council”, which is inspired by the credit councils that steer liquidity towards priority economic sectors in the aftermath of the Second World War. In turn, this council could strengthen the legitimacy of the ECB to tackle climate change and improve the coordination between monetary and fiscal policy.

6With this last development, Monnet’s argument comes full circle: because central banks were created to play an insurance role for welfare States, they should act on contemporary economic challenges such as climate change, crypto currencies and inclusive growth. However, to have the legitimacy to do so, they should break with the CBI template, which defined their mandate narrowly in comparison to historical standards, and improve their coordination with political authorities. This main argument is very convincing because Monnet constantly provides sound empirical and theoretical elements from various academic disciplines to back it up. For example, to prove that the ECB sovereign debt purchases is rather a return to normality than a crossing of the Rubicon, Monnet relies on an historical account of central banks operations (23), an analysis of the ECB balance sheet (40) and the CJEU jurisprudence (57) as well as normative theories on democratic systems (77-86). Given the fact that the debate on central banking is too often led by central bankers themselves or framed by macroeconomic accounts, this interdisciplinary perspective is more than welcome.

7However, Monnet’s argument lacks a more developed theoretical framework and a systemic demonstration to be fully convincing. Indeed, while he convincingly explains why central banks should play an insurance role, he is not specific enough about the implications and remit of his proposition. For example, it is unclear how this insurance role intersects with the issue of digital currencies. If Bitcoin and other digital currencies are a speculative investment product rather than a new form of money, it is unclear why central bank digital currencies are an alternative to them. Why, then, focusing on these issue rather than tackling topics that are more directly related with central banks’ insurance role and their promotion of inclusive growth such as the distributive consequences of asset purchases between and within European countries. Unfortunately, Monnet’s conceptualization of central banks’ insurance role does not provide answers to this questioning. Moreover, while Monnet’s argument is about central banks in general, his empirical examples and propositions of institutional reforms mainly focus on the euro area, which is the only monetary area in the world where fiscal policy is shared between different political authorities. This undermines the cohesiveness of the general argument since the issue of fiscal-monetary coordination is crucial in the euro area but less divisive in the UK or the USA. Conversely, details about the implementation of unconventional monetary policy in the euro area are sometimes missing, which makes it harder to understand some dilemma that are exposed in the book. For example, Monnet does not explain that the shift from Long Term Refinancing Operations to Target Long Term Refinancing Operations was caused by the problematic carry trade operations performed by EU banks, that is the fact that private banks were borrowing ECB liquidity for 3 years at 1% and purchasing sovereign debts with similar maturity at a higher rate. In the same vein, in 2016, the ECB had to abandon the most stringent elements of its conditionality component because of banks’ reluctance to borrow liquidity on such conditions. However, these technical issues are crucial for Monnet’s argument to the extent that one of the main dilemmas faced by central banks in their insurance role is precisely related to the difficulty to enroll private finance and steer credit accordingly.

8In sum, the book offers a refreshing perspective on the contemporary challenges faced by central banks today. Thanks to the use of analytical tools from different academic disciplines, Monnet tailors a convincing overall argument about how to reframe the relationship between central banks and political authorities so that the first ones have the legitimacy to play their insurance role. However, the book lacks a more systematic theoretical framework to better define the scope of the argument and engage more systematically with policy dilemma that are directly linked with the insurance role endorsed by central banks, such as the distributive consequences of asset purchases or the difficulties to enroll private finance with monetary policy conditionality.

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Clément Fontan, « Éric Monnet, La Banque-providence. Démocratiser les banques centrales et la monnaie »Œconomia, 12-1 | 2022, 139-142.

Référence électronique

Clément Fontan, « Éric Monnet, La Banque-providence. Démocratiser les banques centrales et la monnaie »Œconomia [En ligne], 12-1 | 2022, mis en ligne le 01 mars 2022, consulté le 10 août 2022. URL : http://journals.openedition.org/oeconomia/12045 ; DOI : https://doi.org/10.4000/oeconomia.12045

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