The article was published on Diena.lv
Choosing the next governor of the central bank is a decision with far‑reaching consequences, as this position influences a country’s economic policy more than many other high‑level offices. Decisions made together with others at the larger table in Frankfurt will be highly profitable for certain wealthy segments of society, while for others they may prove distinctly disadvantageous.
At present, the public discussion about candidates for the position of Governor of the Bank of Latvia includes both serious topics and some rather odd, marginal ones — for example, the suggestion that the central bank should retain its role as a conference organizer. Meanwhile, extraterrestrials are apparently debating what the central bank could do to slow down excessively rapid economic growth. Evidently, this refers to candidates from truly mirror‑world countries, to whom the European Commission’s public warning about the imminent economic downturn does not apply — when speaking of the approaching decline, the Commission urges everyone to “be prepared for anything.”
Therefore, it is important to understand the “ideology” of the candidates in the financial sphere and what instruments they would propose in the context of the approaching economic downturn and crisis.
FISCAL FUNDAMENTALISTS ARE, FOR THE MOMENT, WINNING
The charming populist Minister of Health, Ilze Viņķele, by attacking one of the sacred cows, called for an increase in the budget deficit to raise doctors’ salaries — in other words, to use a “fiscal stimulus.” The coalition, however, did not support this, maintaining strict fiscal discipline. Admittedly, in other EU countries such fiscal stimulus is typically encouraged for infrastructure and other investment projects. But the principle remains the same — to use it. This is one of the central issues when choosing a central banker.
What the best Latvian analysts describe as “fiscal fundamentalism” is being questioned in other European Union countries. At the same time, there are calls — particularly with regard to Germany — to make broader use of “fiscal stimulus,” that is, to invest budget funds by increasing the deficit. Germany’s Greens demand that more budget money be invested in climate protection and the social sector, placing them ideologically close to Viņķele.
Calls to increase public investment are now being echoed by Germany’s largest business associations. The European Central Bank likewise expects greater investment in those countries with balanced budgets — ECB President Draghi has expressed clear support for fiscal stimulus. The president of the Eurogroup also urges “pre‑emptive action to avoid a recession.” Their motivation is to prevent, or at least delay, an economic downturn — whereas in Latvia, the current motivation would be to quell the protests of medical workers. Latvia would more closely resemble France, where the president used public funds to suppress the Yellow Vest protests, ignoring the fiscal fundamentalists. Money is the best “medicine” in such situations; only the security police might be even more effective.
Situations differ across countries, yet some form of budget‑deficit expansion is being discussed almost everywhere. It is hard to believe that, in Latvia’s case, the €60 million needed to raise doctors’ salaries — if financed through a higher deficit — would destroy the country’s credit rating and significantly increase the cost of borrowing on international markets.
Moreover, the new European Commission may itself propose a revision of fiscal policy principles and of the Stability and Growth Pact. Central banks will play an important role in this process.
The second issue is equally important — whether to agree to restart the active asset‑purchase programme, commonly referred to as printing new money, or to oppose it. This “quantitative easing” programme operated after the last financial crisis but was later closed. Central bankers make this decision at the ECB table. At the most recent discussion on September 12, there was no unanimity, as Germany, France, the Netherlands, Austria and Estonia opposed the creation of new money — although they were unable to prevent a positive decision. The ECB had long been buying assets and “printing” new money, yet it has not generated economic growth. For now, it is unclear why this time should be any different.
Moreover, this programme leads to a depreciation of the euro. U.S. President Donald Trump sharply criticizes the EU for this artificial weakening of the euro and issues various threats. As a result, central bankers are effectively making a highly political decision regarding a potential trade conflict with the United States.
The third topic touches the cornerstone of the financial world — whether to maintain the dominance of the dollar or replace it with something new. The Governor of the Bank of England outlined the idea of replacing the dollar at the annual central bankers’ conference in the United States. It is one thing when Russia’s president speaks about a rapid decline in the dollar’s importance; it is quite another when the message comes from one of the leading figures in London’s financial centre. Before the Bank of England, the Pope expressed a similar idea in slightly different words — and his position alone requires him to be considerably more far‑sighted. Around ten years ago, the Pope suggested that a global central bank should be created to replace the International Monetary Fund.
Once, the IMF’s Managing Director, Dominique Strauss‑Kahn, spoke about a fundamental reduction in the role of the dollar. That was perhaps not the most carefully considered move — soon the media began widely reporting that he had allegedly harassed a hotel maid, and, of course, he had to abandon both his ideas and his career. One can only hope that the Governor of the Bank of England does not use hotel services and thus avoids such an unenviable fate.
WHO SHOULD BECOME THE CENTRAL BANKER
Many sacred cows and taboo topics are disappearing before our eyes. Global changes will continue — through a certain degree of chaos and a period of economic downturn — and they are only just beginning. Stricter limits on the use of cash, various climate‑related, plastic‑related and other new taxes, as well as more forceful control mechanisms, seem inevitable if developments continue as they have recently. Moreover, Draghi, in describing the new ECB President Lagarde, said that she is highly imaginative and creative. Reliable and experienced central bankers must be in key positions — someone will have to explain these unpopular decisions to the broader public and justify them before society.
Malicious tongues have recently claimed that individuals who have held truly important positions in Europe have had scandals or questionable actions in their recent past. Both the newly appointed ECB President Lagarde, who has shadows of dubious decisions from her earlier roles in France, and the European Commission President von der Leyen in Germany, have been mentioned in this context. The suggestion is that people burdened by past controversies are (more easily) guided and therefore suitable for high office. Fortunately, this principle is never applied in Latvia.
