Central banks are never independent from politics. The bankers who run those organizations may have the institutional power to define their own objectives, the technical capability to adjust the settings on their monetary instruments, and strong legal protections around the terms and conditions for their employment. But none of that is enough to insulate them from politics. Determined politicians will find a way to exercise influence, no matter what the obstacles. More often than not, such politicians will do so without even implicating the legislative process. They do not have to rewrite the laws to violate central bank independence. Politicians only need to take advantage of the fact that central bankers come from society, they (and their families) have to live somewhere, and eventually they will also retire.

This is the harsh reality that former Cypriot central bank governor Panicos Demetriades reveals in his analysis of central bank independence. His point is not to deny the very strong theoretical reasons for trying to create a division between politics, on the one hand, and monetary policy, on the other. Rather it is that any such arrangement is only as sound as the commitment among politicians to respect the divide. Once that commitment wavers or the respect is lost, then central bankers are no more independent from political influence than anyone else. They can be pressured, scapegoated, outnumbered, intimidated. Moreover, the smaller and more tightly knit the society, the easier it is for politics to predominate.

Demetriades makes this argument by using his own experience as a case study. He is careful to note, however, that his experience is not unique. Central bankers in other countries have found themselves in similar situations – right down to the level of intimidation. And the more that experience has been repeated, the easier it has become for politicians to copy. If there was a consensus on the virtues of central bank independence, that consensus is now broken.

Demetriades’ argument has important implications for the euro area and the European system of central banks. Because Europe’s economic and monetary union includes a large number of very small countries, the European community of central bankers has many points of vulnerability.