Optimism in Independence: The European Central Bank after the 2008 Global Financial Crisis

Abstract

The effects of the 2008 Global Financial Crisis (GFC) on finance and monetary policy continue to be widespread. Now, policymakers are seeking to determine the best approach for managing and resolving the crisis; one such strategy has been to delegate more legitimacy to independent central banks. When will a political leader support or undermine the legitimacy of an independent central bank in the aftermath of an economic crisis? We argue that the central mechanism for determining a change in views of central bank legitimacy is the optimism of the political elites. Therefore, if a government is optimistic about its chances of retaining power and securing economic recovery, it will be more likely to issue positive, legitimizing statements toward its independent central bank. We test this argument using the compelling and critically important case of the European Central Bank following the 2008 Global Financial Crisis, and we determine that the level of political optimism has a strong impact on the continued legitimacy of independent central banks. In so doing, our study highlights the complicated strategic political choice of using central banks to respond to financial crises.