The ECB has lost its independence in the wake of the debt crisis, former member claims

  • ECB President Mario Draghi is doing "whatever it takes" to save the euro but that's eroded independence, Panicos Demetriades, a former Governing Council member said.
  • Demetriades said this erosion of independence "started in Cyprus as a result of the unprecedented banking crisis in 2013… and continued in Slovenia and Latvia, more recently."
  • According to the ECB's website, "the political independence of the ECB is instrument to its primary objective of maintaining price stability."
European Central Bank (ECB) President Mario Draghi.
Yves Herman | Reuters
European Central Bank (ECB) President Mario Draghi.

The European Central Bank (ECB) has lost its independence after gaining additional powers following the 2011 sovereign debt crisis, a former member of its Governing Council has told CNBC.

Panicos Demetriades served as governor of the central bank of Cyprus and was a member of the Governing Council of the ECB from May 2012 until stepping down in April 2014. During that time, Cyprus saw one of the biggest banking crisis in the euro zone, which required 10 billion euros in financial help from its euro partners.

Demetriades claims he came under pressure from the right-wing government of Nicos Anastasiades, which took power in March 2013, and ended up resigning from his position.

At the time, the tense episodes between the central bank and the government included a commitment from the latter to sell some of the country's gold reserves, without informing the Cypriot central bank, which is the treasurer.

Speaking with CNBC in a phone conversation Monday, Demetriades said: "(ECB) President (Mario) Draghi has made his personal project to do 'whatever it takes' to save the euro and he's been consistent with that. But that's created some unintended consequences, such as the erosion of central bank independence, especially in the periphery."

In July 2012, Draghi claimed he would do "whatever it takes" to restore the euro zone economy and save the euro. According to Demetriades, this led to a general perception that governments could do what they wanted, and that the ECB would be there to rescue their economy, no matter what.

Central bank governors are appointed by national governments and have a seat at the ECB table.

"Independence is one of the most important goods for the ECB," Carsten Brzeski, chief economist at ING in Germany, told CNBC via email. "Even more so, as the ECB is in fact a central bank without a country, a supranational institution. Therefore, independence from both European and national politics is essential. It is essential for conducting monetary policies, fit for the entire euro zone."

Demetriades said that this erosion of independence "started in Cyprus as a result of the unprecedented banking crisis in 2013… and continued in Slovenia and Latvia, more recently."

In 2016, Slovenian authorities investigated the country's central bank chief Bostjan Jazbec for "criminal abuse of office" and seized documents that contained ECB information. He resigned from his position as a result. More recently, the central bank governor of Latvia, Ilmars Rimsevics, was detained in February on corruption allegations, but was released on bail the following day. He claimed he was the victim of a concerted campaign by several banks.

"It's very telling what happened to the Latvian governor, if you want to get rid of your governor, you just need some serious allegations and you can get it done over a weekend," Demetriades told CNBC.

"The accumulation of additional powers in the wake of the crisis, such as bank supervision and bank resolution, which are inherently more political, has created a backlash against central bank independence."

The ECB did not want to comment on the issue when contacted by CNBC. But according to its website, "the political independence of the ECB is instrument to its primary objective of maintaining price stability."

Europe's central bank was given additional powers in the wake of the debt crisis that shook the continent to ensure a stronger financial stability. These included overseeing the balance sheet of the euro area banks and requesting additional capital, if needed.

Arguably, the expansion of powers has increased the pressure on central bankers, who now have to deal with more than just ensuring the right level of inflation.

According to Brzeski, the additional powers "could eventually indeed lead to a conflict of interest, particularly in a situation in which the economy could need higher interest rates, while banks could not."

"However, I don't think that the additional powers are compromising independence," he added. "At least not on monetary policy. This is such a precious good, the ECB would never ever let go, under no circumstances."