Despite occasional grumbles from politicians, no one seriously doubts the European Central Bank's independence, or that monetary policy within the euro zone is therefore well insulated from political pressures. But the recent death of the Stability and Growth Pact-killed off by Germany, its father, with France acting as co-conspirator and willing accomplice-reminds us of a key lesson: elected politicians find it hard, if not impossible, to relinquish substantial power in the area of fiscal policy.
The same is true across the Atlantic. The US Federal Reserve Board is, of course, very independent. But any attempt to limit the fiscal discretion of America's Federal government in the manner of the Stability Pact-for example, the infamous Gramm/Rudman rules of the Clinton era-always collapse in the end in the face of presidential and congressional pressure.
Monetary policy can be used to stimulate an economy just as much as fiscal policy, if not more, in election years, which politicians will always want to do. But reckless use of either mechanism for short-term goals may create long-term costs, justifying some restrictions on politicians' latitude in influencing macroeconomic policies.
When politicians can control inflation by exercising decisive sway over central banks, they can use their power to devalue the burden of public debt, avoiding the need for more taxation to pay it off. This was the great lesson of the 1970's and early 1980's, when rampant inflation forced politicians to surrender this power to independent central banks, which alone could convince markets that price stability would be restored.