​Mehmet Gürkan Çınar

The legal architecture of public authorities governing money has always been reshaped in times of crisis. Today, central banks, as the creators of public money, stand as the most significant public authorities over the monetary system. In liberal market economies, the currently dominant legal framework governing central banks emerged as a result of the interrelated crises that began in the 1970s. The collapse of the Bretton Woods system, followed by years of soaring inflation, created what can be described as an interregnum for monetary governance.¹ From the 1980s onward, a new institutional order took shape. The phenomenon that defined this new period was financialisation; in other words, the powers of private actors over money increased considerably. In the public sphere, the idea of central bank independence became the cornerstone of the normative framework. A new legal architecture was born, characterised by independent central banks with narrow  price stability mandates, a strict institutional separation of fiscal and monetary powers, and a corresponding prohibition on monetary financing. The legal framework of the European Central Bank (ECB) embodies all these institutional features. 

However, the Global Financial Crisis of 2007 and its aftermath have been widely interpreted as the beginning of a new interregnum. The unconventional policies deployed by central banks in response to both the financial crisis and the COVID-19 pandemic called the legal framework of central banking into question. That framework, its justification now deeply contested, nonetheless remains in force. This is precisely what defines an interregnum. The old order has been hollowed out, yet no new one has taken its place. What follows examines this condition through the crisis of central bank independence in the context of the ECB. 

Central Bank Independence and Its Justifications 

The legal architecture centred on the idea of central bank independence gained worldwide acceptance in the 1990s.² One aspect of this transformation stemmed from widespread conviction among advanced economies that a central bank with a narrow price stability mandate was the best means of preventing inflation. This global diffusion was also driven by the promotion of central bank independence by international institutions like the IMF as a benchmark of good governance. Turkey, for instance, amended its central bank legal framework as a requirement of the Stand-by Agreement it concluded with the IMF following the 2001 crisis, thereby institutionalising central bank independence and its accompanying legal arrangements, such as the prohibition of monetary financing.³ 

The intellectual foundations of this institutional shift, however, predate its diffusion. The collapse of the post-war monetary order and the high inflation crisis of the 1970s brought monetarist ideas to prominence in economic and political discourse.⁴ As an economic doctrine, monetarism identifies the root cause of inflation in the excessive growth of the money supply, making the financing of government spending by central banks the principal danger. Relatedly, the public choice argument posits that politicians face a perpetual temptation to manipulate monetary policy, engineering temporary economic booms ahead of elections for short-term electoral gains while risking long-term inflation.⁵ To prevent this opportunistic abuse, it is argued that the optimal solution is delegating monetary policy to an independent central bank with a narrow mandate focused on price stability. 

Another influence of monetarist thought was the conception of monetary policy as a purely technical instrument with no lasting real economic effects.⁶ When a central bank raises interest rates, it may reduce inflation while also pushing up unemployment. Yet, according to the doctrine of the long-run neutrality of money, such effects are merely transitory. In the long run, monetary policy alters only nominal variables such as prices, leaving real variables such as output and employment unchanged. On this view, monetary policy carries no distributive stakes and is therefore a technical rather than a political matter, best left to experts insulated from democratic contestation. This assumed technical nature of monetary policy provides the justification for central bank independence.⁷ 

A constitutive legal feature of the central bank independence framework is the prohibition of monetary financing, which can be defined as the creation of public money to fund government expenditure. In the post-war monetary orders of most liberal market economies, fiscal and monetary powers were closely coordinated, often involving the monetary financing of government deficits.⁸ The prohibition of monetary financing forces governments to rely solely on taxation or on debt financing through the markets; in other words, it subjects their spending to market discipline. In this vein, public finance comes to be conceived on the model of a private household. Governments must demonstrate their creditworthiness to capital markets in order to fund themselves.⁹ 

Central bank independence is enshrined in the legal framework of the EMU. The ECB's independence is guaranteed under Articles 130 and 282 TFEU, while price stability is established as its primary objective under Article 127. Article 123 TFEU, in turn, prohibits the ECB from purchasing government debt directly from Member States. These features of the ECB are entrenched in EU primary law and can be altered only through the treaty amendment procedure, which requires the approval of all Member States. They are therefore placed beyond the reach of any ordinary legislative majority. As a result, the ECB enjoys a degree of insulation from elected institutions far greater than that of any national central bank. 

Unconventional Times 

The Global Financial Crisis brought profound changes for central banks and, in the view of many, inaugurated a new era in central banking. Yet, as the following discussion shows, while the justification for independence has lost much of its force, its legal architecture remains largely intact. 

Before the crisis, the conventional tool of central banks was setting the short-term interest rate to achieve their narrowly defined aim of price stability, defined as 2% inflation by most central banks, including the ECB.¹⁰ Operationally, central banks steered market interest rates toward their target rate via open-market operations, thereby influencing the cost of credit and thus inflation. Central banks also reinforced these effects through public announcements that shaped market expectations. Through this process, central banks appeared removed from distributive and political questions, defining their role as a technical one. Yet even this conventional form of central banking could be challenged on distributive grounds. A central bank's decisions may involve a trade-off between inflation and unemployment, and this trade-off is not merely a technical choice but one that involves values. A focus on price stability tends to protect the interests of holders of financial assets, whereas unemployment mainly hurts the most vulnerable workers.¹¹ Although this line of criticism existed before the financial crisis, the hegemonic view still conceived the operations of central banks as a technical matter. 

The Global Financial Crisis disrupted the way central banks operate. Following the freeze of interbank lending, the ECB began providing liquidity support to commercial banks, and subsequently launched its quantitative easing programmes, purchasing financial assets ranging from government bonds to corporate securities.¹²  Several of these programmes raised important distributive questions. 

Through its refinancing operations, for instance, the ECB provided large volumes of credit to commercial banks at almost zero interest rates and banks in turn profited by using much of this credit to purchase higher-yielding government bonds.¹³ Other programmes, such as the Corporate Sector Purchase Programme, involved the direct purchase of bonds issued by non-financial corporations. The ECB framed this programme as an instrument of its price stability mandate and implemented it according to objective eligibility criteria, presented as involving no political choices. Yet its implementation still produced marked distributive outcomes.¹⁴ Most strikingly, in the post-crisis environment it encouraged firms to engage in share buybacks rather than productive investment, thereby contributing to the enrichment of shareholders. More broadly, the unconventional tools deployed not only by the ECB but by central banks across the developed economies drove up the prices of assets such as equities and real estate, deepening the divide between those who hold such assets and those who do not. 

As part of its unconventional tools, the ECB also purchased government bonds on secondary markets, which raised the question of their compatibility with the prohibition of monetary financing under Article 123 TFEU before the CJEU. In both Gauweiler (C-62/14, 2015), concerning the Outright Monetary Transactions programme, and Weiss (C-493/17, 2018), concerning the Public Sector Purchase Programme (PSPP), the CJEU held that the ECB's secondary market purchases do not constitute a circumvention of Article 123 TFEU and are therefore compatible with it. According to the CJEU, safeguards provided by the programmes prevent the intervention from having an effect equivalent to a direct purchase and from undermining the Member States' incentive to maintain sound public finances. The CJEU also classified both programmes as falling within the ECB's mandate, treating them as essentially monetary rather than economic policy. Yet during the pandemic, the ECB again purchased government bonds, this time abandoning many of the safeguards that had constrained its earlier programmes. For this reason, the PEPP has been described in the literature as an overt instance of monetary financing even though the ECB continued to frame it in terms of its price stability mandate.¹⁵ However, unlike the OMT and the PSPP, the PEPP was never referred to the CJEU. 

Another factor undermining central bank independence in the case of the ECB was the expansion of its duties during the crisis period. Historically, central bank independence has gone hand in hand with a narrow set of objectives.¹⁶ The post-crisis ECB departed from this pattern. Under the Single Supervisory Mechanism it acquired supervisory powers over the banking sector, while the most controversial extension of its role and the clearest instance of its politicisation was its participation in the Troika during the sovereign debt crisis, which drew it directly into the design and enforcement of fiscal adjustment programmes. These expanded duties raised the question of how much power could legitimately be concentrated in a non-elected body. 

Conclusion: An Unfinished Interregnum 

Since 2022 the ECB has ceased to deploy unconventional monetary policies and has entered a tightening cycle, contracting its balance sheet. Yet this does not mean the instruments it used were merely transitory or that central banking has returned to the conditions of the great moderation era of pre-2007. Above all, the ECB itself states that it continues to keep its unconventional tools within its toolkit.¹⁷ Although there is no sovereign debt crisis at present, the structural fragility of the euro area persists.¹⁸ Indeed, precisely because of the risk that significant divergences might emerge between the borrowing costs of Member States, the ECB announced the Transmission Protection Instrument in 2022. The instrument has not been used but it signalled to the markets that, where necessary, the ECB would purchase government bonds on the secondary market without any preset limit. 

Moreover, rising geopolitical risks and the supply shocks that accompany them make financial fragility more likely. Such an environment will keep both the powers the ECB exercises and, more broadly, the model of central bank independence open to contestation. In this respect, the interregnum is far from over. 

Although the legal framework governing the ECB has undergone no major change, the growing number of tasks it has assumed since the financial crisis has placed the reassessment of its mandate on the agenda. Because the ECB's expanding powers open space for politicisation, it is frequently argued that a legal structure attentive to new mechanisms of democratic accountability must be established.¹⁹ Rethinking the legal architecture of money in democratic terms, however, requires more than examining the relation between central banks and other public authorities. It must equally address their relation to the structural power of the financial sector. The period opened by the Global Financial Crisis, and not yet closed, thus promises to reopen a deeper question, that of how money can be governed in a democratic society. 

References:

1 Charles AE Goodhart, ‘The Changing Role of Central Banks’ (2010) BIS Working Papers No 326, 2.

2 Kathleen McNamara, ‘Rational Fictions: Central Bank Independence and the Social Logic of Delegation’ (2002) 25(1) West European Politics, 47.

3 Government of Turkey, ‘Letter of Intent’ (3 May 2001) 42 <https://www.imf.org/external/np/loi/2001/tur/02/> accessed 6 July 2026.

4 Stefan Eich, The Currency of Politics: The Political Theory of Money (Princeton University Press 2022) 193.

5 For an influential formulation of the public choice argument, see James M Buchanan and Richard E Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (Liberty Fund 2000).

6 Jens van ’t Klooster, ‘Central Banks’ in Richard Bellamy and Jeff King (eds), The Cambridge Handbook of Constitutional Theory (Cambridge University Press 2025) 629–30.

7 Jens van ’t Klooster and Clément Fontan, ‘The Myth of Market Neutrality: A Comparative Study of the European Central Bank’s and the Swiss National Bank’s Corporate Security Purchases’ (2020) 25(6) New Political Economy, 868.

8 Jens van ’t Klooster, ‘Technocratic Keynesianism: A Paradigm Shift Without Legislative Change’ (2022) 27(5) New Political Economy, 776.

9 Isabel Feichtner, ‘Public Law’s Rationalization of the Legal Architecture of Money: What Might Legal Analysis of Money Become?’ (2016) 17(5) German Law Journal, 888.

10 Peter Dietsch, François Claveau and Clément Fontan, Do Central Banks Serve the People? (Polity Press 2018) 9–13.

11 Joseph E Stiglitz, ‘Central Banking in a Democratic Society’ (1998) 146(2) De Economist, 217.

12 Dietsch, Claveau and Fontan (n 10) 14.

13 Costas Lapavitsas and Matteo Giordano, ‘ECB Monetary Policy in a Quandary’ (2026) European Law Open,12.

14 van ’t Klooster and Fontan (n 7) 873.

15 van ’t Klooster (n 8) 776–79.

16 Clément Fontan and Antoine de Cabanes, ‘Central Banks’ in Martino Maggetti, Fabrizio Di Mascio and Alessandro Natalini (eds), Handbook of Regulatory Authorities (Edward Elgar 2022) 95.

17 ECB, ‘An Overview of the ECB’s Monetary Policy Strategy’ (June 2025) 11 <https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview202506_strategy_overview.en.html> accessed 6 July 2026.

18 Lapavitsas and Giordano (n 13) 19–20.

19 Anna-Lena Högenauer and Joana Mendes, ‘Maastricht Overcome: An Evolving Disconnect Between the ECB’s Power and Independence’ (2025) 13 Politics and Governance, 5.