Financial independence and its implications for euro area central banks

The principle of financial independence recently recognized by the Court of Justice in the Banka Slovenije judgment requires that euro area central banks should be able to avail themselves with sufficient financial resources to carry out their tasks, as in situations in which central banks are financially dependent on the State to operate, the latter might impose conditions impairing the monetary policy objective. The Banka Slovenije judgment arrives within a context never faced before by the Eurosystem, that of several euro area central banks facing losses from the implementation of the monetary policy function. This novel situation, which is very likely to be prolonged over the next years, together with the articulation of the principle of financial independence by the Court of Justice, has an impact on the role of the State as a possible last resort provider of additional capital to the central bank, on the tools that central banks have in place to protect themselves against losses, and on the stability of accountability arrangements. This article assesses this impact and proposes a mechanism based on the reallocation of losses to the ECB which reinforces the financial independence of euro area central banks and streamlines accountability practices.