Response to MINA Business on Central Bank Independence (June 24, 2010)

June 24, 2010

Jan-Peter Olters, World Bank Representative

History has shown that high and escalating inflation rates, or financial and banking-sector crises, can wipe out a life’s worth of savings, often the starting point of unfavorable political dynamics.

The global financial crisis, for instance, was triggered by insufficient supervision of a particular segment of mortgages in the US market, and it is only the latest example demonstrating the importance of effective oversight.

Europe’s long history is littered with episodes of (hyper-)inflation and financial crises, having convinced economists and policymakers alike that functional and operational central bank independence is, next to democracy itself, the most effective institutional instrument of improving long-term economic performance.

European laws thus proscribe that neither the European Central Bank nor the national central banks—or, for that matter, any member of their decision-making bodies—are allowed to seek or take instructions from EU institutions or governments, requiring the executive branches of all EU member states to respect this principle and precluding them from seeking to influence the members of the decision-making bodies of the ECB or national central banks.

The Government and Central Bank of Montenegro have worked closely with experts from European institutions, the IMF, and the World Bank to draft very solid organic laws in line with international best practice and European standards and principles.

Central bank independence means, of course, that the monetary authorities can take appropriate actions—within the mandate of, and using the instruments foreseen in, the Central Bank Law—that are deemed necessary to ensure low inflation and financial stability, even if Government does not (fully) endorse such a decision.

It would be regrettable if the enactment of the financial-sector laws, which are of highest quality, ends up not being recognized as a clear and courageous signal sent by Montenegrin policymakers to strengthen their public institutions and reinforce mechanisms to ensure the stability of prices and the financial sector but would create obstacles en route to achieving the Government’s overarching policy objectives.