Populists versus central banks: How vulnerable is the ECB?

It just doesn't stop. Almost daily,Donald Trump (79) personally attacks the US Federal Reserve and its chairman , Jerome Powell (72). The accusations are getting increasingly vicious: idiot, blockhead, clueless. Now he's also being asked to answer for the skyrocketing renovation costs of the Federal Reserve's headquarters in Washington. Allegations of fraud are looming.

The US President has reportedly already drafted a letter of resignation and asked members of his Republican Party whether he should send it. Treasury Secretary Scott Bessent (62) says the process of finding a successor has already begun. Powell's term as Federal Reserve Chairman runs until next May. If necessary, Bessent could even lead the Fed in parallel, so to speak.

On Thursday, the Governing Council of the European Central Bank (ECB) will decide on the future course. There will likely be no changes. Inflation has calmed down. Everything looks quite stable. ECB President Christine Lagarde (69) is appearing before the press. A technocratic ritual is taking place – serious, solid, and heavy on numbers.

But the Washington roar is also reaching Frankfurt. Is it conceivable that a coalition of illiberal national governments in the Eurozone could deprive the ECB of its independence? What consequences would that have for price and financial stability here?

The ECB is actually well protected. Thanks to the EU Treaty, the Central Bank Statute, and the central bank laws of the member states, it is more independent than any other central bank in the world. According to an analysis by Dublin-based economist Davide Romelli, the ECB scores 0.9 on a scale of 0 (fully dependent) to 1 (fully independent). The US lags significantly behind , at 0.61.

But that doesn't mean much. Laws are one thing. It's a completely different matter whether politicians and big business respect the spirit of a transparent, rule-based economic and monetary order—or whether they resort to tricks to get the most out of it for themselves, even if it leads to inflation and financial crises.

Take Turkey , for example. According to Romelli's indicator, the central bank in Ankara has a value of 0.8. It is therefore formally highly independent. In fact, however, President Recep Tayyip Erdoğan (71) has repeatedly replaced central bank governors in recent years when they – unsurprisingly – failed to deliver the mix of low inflation and low interest rates he demanded. The consequences are well known: triple-digit inflation rates and a collapse of the lira's exchange rate.

"Populist politicians often bring nominally independent central banks under their control without having to change their legal status," write Canadian economists Michael Gavin and Mark Manger in a paper on the subject . In their empirical analysis, they conclude that populist governments are more likely to "exert public pressure on the central bank"—and are more likely to succeed in doing so, unless "financial markets keep them on track."

It's this tug-of-war that's currently occupying the stock markets. Investors react nervously whenever Trump launches a new insult against the Fed chairman. When prices collapse, Trump backtracks and says something reassuring. For example, that he has no intention of removing the Fed chairman from office prematurely.

That sounds a bit like SED leader Walter Ulbricht , who announced just weeks before the Berlin Wall was built in 1961: "No one has any intention of building a wall." And I suspect that, like Ulbricht, there is a longer-term plan behind Trump's actions. The idea is to normalize what is actually scandalous through verbal pinpricks to such an extent that the ultimate usurpation of power is ultimately accepted with a shrug. The growing volume of attacks on the Fed's independence would therefore not be a whim of the president, but a perfidious calculation. At some point, citizens and investors will be so confused by the constant back and forth that they will only register the final step of a hostile takeover with weariness.

For years, Trump has left little doubt that he wants to bring the Federal Reserve under his control. Interest rates are too high for him. Given high national debt and budget deficits, he hopes this will provide him with additional financial flexibility. But there are also more fundamental issues at stake: Trump wants complete control over all institutions. An independent central bank is inconsistent with his autocratic identity. Anyone who governs with a claim to sole representation also demands control over the most important price in the economy: interest rates.

By the way: The US key interest rate is currently at 4.3 percent, more than twice as high as in the Eurozone. For Trump, this is proof that the Fed is unnecessarily holding back the US economy and preventing it from becoming great again . He recently even called for an immediate interest rate cut of three percentage points. This is, of course, utter nonsense – coming from someone who has repeatedly claimed to understand more about monetary policy than the combined expertise of the Fed.

Whether the key interest rate is measured or not depends on the overall economic climate. And in the US, this is largely determined by the president's self-destructive tariff policy, which makes imports more expensive and drives up prices. This is why the US inflation rate has recently picked up again; consumer prices are persistently rising at annual rates well above the target of 2 percent, unlike in Europe. Restrictive immigration and deportation policies are tightening the labor market, especially in agriculture and the food industry, where wages are rising.

A classic benchmark for determining the appropriate key interest rate is the so-called Taylor rule. Common specifications currently indicate values between 3.9 and 4.9 percent —roughly the level Powell and colleagues consider appropriate. If the Fed were to sharply lower interest rates, as Trump has demanded, inflation would likely skyrocket.

The independence of the central bank helps maintain price stability precisely because it is protected from the whims and short-term power-tactical interests of politicians. This does not mean that central banks do not make mistakes—or that they cannot be criticized. They are accountable to parliament and the public. And they are bound by laws that require them to limit their activities to a few specific economic policy objectives.

As already mentioned, the ECB is formally highly independent. According to its statutes, which are part of the EU treaties, the central bank's leaders are even expressly forbidden from "receiving or even seeking instructions,"as stated in Article 7. The members of the Executive Board, the six-member ECB Executive Board led by President Lagarde, are appointed by the heads of state and government for eight years, with overlapping terms of office so that the entire Executive Board is never replaced at once, which is intended to ensure continuity. Members may only serve one term to prevent them from making concessionary decisions in favor of a contract extension. Candidates are to be chosen and appointed only by common accord from among persons of recognized standing and professional experience in monetary or banking matters (Article 11). Technocrats among themselves.

The ECB has its own budget, so it cannot be pressured by funding cuts. It can choose the instruments it uses to control the money supply. By law, it is committed to a single "primary objective," namely "maintaining price stability." The ECB defines exactly what this means. And so on and so forth. There are many safeguards designed to protect the ECB from external pressure.

And yet: it is not unassailable.

It's conceivable that national-populist politicians could come to power in a number of Eurozone member states. This is by no means far-fetched. I know not all populists are the same—or equally dangerous. But if a cross-border coalition of nationalists emerges who no longer want to leave the EU and the euro, but instead plan to take over the European institutions from within, then we would be faced with a new situation.

Robert Fico (60) is already Prime Minister in Slovakia, and Giorgia Meloni (48) in Italy . In Austria, the Freedom Party of Austria (FPÖ) has participated in governments. In Croatia, nationalist forces have repeatedly emerged as the strongest groupings in elections. In Bulgaria (which will join the euro in early 2026), a populist party is part of the coalition government. In Germany, the AfD is consistently polling as the second strongest party—who knows how long the "firewall" will hold.

The year 2027 could prove decisive. Presidential elections will be held in France in April, and Marine Le Pen 's (47-year-old) National Rally could win, even if Le Pen may not be allowed to run herself. In the last election, she trailed incumbent Emmanuel Macron by just a few percentage points.

Shortly thereafter, in October 2027, ECB President Lagarde's term of office expires. This means that the Council of Heads of State and Government will likely have to make a "unanimous" decision on her appointment this summer. And what if they can't agree?

High levels of debt are weighing on France and Italy in particular. Liabilities are also rising elsewhere, particularly due to military buildup, not least in Germany. A more lax central bank might seem tempting under these conditions, even if it drives up long-term capital market interest rates and thus complicates the situation for finance ministers in the long run.

Gradually, the top management could be replaced with more compliant leaders – at the central banks of the current 20 eurozone countries, whose heads make decisions in the ECB Council together with the members of the Executive Board, and at the Frankfurt Executive Board itself. Euro nationalists could come up with the idea of shifting the balance of power within the ECB by leaving positions on the Executive Board vacant. National central banks would gain correspondingly more influence. Various disruptive maneuvers are conceivable.

So far, the ECB is far from such a scenario. Trump's constant barrage of attacks on the Fed shows what's possible. It's better not to let it get that far.

Monday

Berlin – Merz and the German Gap – For many years, there has been too little investment in Germany. Now, a high-profile initiative by several large companies aims to change that. The Chancellor is hosting an "Investment Summit" at the Chancellery. Reporting Season I – Business figures from Ryanair , NXP, and Verizon.

Tuesday

Reporting season II – business figures from SAP , Sartorius , Dassault Aviation, Akzo Nobel, Alfa Laval, Julius Bär, Coca-Cola, Lockheed Martin, Halliburton, Northrop Grumman, General Motors.

Wednesday

Reporting season III – business figures from Hochtief, UniCredit , Alstom, Thales, Equinor, Iberdrola, Alphabet, Tesla, AT&T.

Thursday

Frankfurt – Restraint! – ECB Council meeting with interest rate decision. Followed by a press conference with ECB President Lagarde.

Reporting season IV – business figures from Deutsche Bank , MTU, Vossloh, Dassault Système, BNP Paribas, Michelin , Orange, Roche, Lloyds Banking, Vodafone, BT, Anglo American, Reckitt Benckiser, Dow, Southwest Airlines, Blackstone.

Friday

Munich – An upswing is not getting underway – The ifo Institute publishes its monthly business climate index on the mood among companies.

Reporting season V – business figures from Volkswagen, Traton , Deutsche Börse , Vallourec, ENI, Natwest,