The imminent collapse of central banks

By: Jurgen Stark

Tübingen – Inflation rates are expected to decline across the western world as energy prices continue to fall and the primary impact of last year’s price hikes begins. However, prices are likely to remain unacceptably high for the foreseeable future, making price stability a remote possibility.

Moreover, rising wages and current geopolitical tensions, coupled with long-term structural factors such as demographic changes and collapsing globalization, are expected to keep inflation expectations above the central bank’s target level, burdening Western economies and societies in the long run.

Now is the time for central banks to take decisive action and improve their communication strategies. Policymakers urgently need to explain the reasons behind the current high inflation, its consequences and the measures taken to address it. This communication should not be limited to market participants, since citizen participation is just as important, if not more important. In fact, citizens are central banks’ most important partners in fighting inflation and protecting their independence.

Effective communication requires a great deal of insight, self-criticism, and humility. In the past, central banks have made some mistakes, such as misdiagnosing a period of price stability as a bout of unacceptably low inflation. Its asymmetric monetary policy over the past several decades, which resulted in a gradual decline in interest rates, has reduced potential room for maneuver and led to severe market distortions. However, despite clear evidence of the damage caused by their highly expansionary policy of low interest rates and massive expansion of the balance sheet, central bankers have repeatedly delayed ending it.

It took policymakers a long time to recognize the inflationary forces unleashed by the supply chain disruptions linked to the spread of COVID-19 and the war in Ukraine. They ignored or turned a blind eye to crucial economic and monetary indicators, considered price hikes to be a “temporary” phenomenon that did not require immediate action, and sent misleading signals to markets and the public that interest rates would remain low until 2024. Because of these miscalculations and the delayed response to inflation, the banks had no choice. Centralization has no choice but to pursue sharp increases in interest rates that have caught market participants by surprise and created distortions.

Central bankers who were celebrated as heroes have damaged their credibility by turning away from their core mission of ensuring price stability to pursue other, unrelated policy goals. In the eurozone countries in particular, it was their analytical failures and professional miscalculations that raised doubts about the credibility and effectiveness of their policy-making and recommendations to governments.


In order to restore the people’s trust, central banks must abandon their ivory tower. As interesting as the lectures at universities and think tanks may be, their primary role is to stress the importance of central bankers. But hard academic rhetoric will not help central banks win over public opinion. In its 2021 Strategic Review, the ECB stated that it should use clearer language in future communications to help the public understand complex issues without oversimplifying them. Unfortunately, the ECB has not updated its rhetoric since then nor has it become more considerate of its citizens.

The European Central Bank, which is responsible for ensuring price stability in 20 European countries, has become so far removed from the people it serves that it must do much more to bridge the gap. Since it communicates mainly in English, every verbal and written statement must be translated into the national languages, and the job of engaging the people mostly falls to national central banks, although this role is not clearly defined. In the pre-euro era, central banks communicated with citizens more effectively, maintaining a level of trust that the European Central Bank currently lacks.

However, national central banks have become more alienated from the public since the introduction of the euro almost 25 years ago. Part of the failure of national monetary policymakers to act as effective brokers of information is due to internal rifts in the ECB’s Governing Council. While using these disagreements as an opportunity to rally public support for opposing views would have been problematic in the ECB’s start-up phase, it may become less important as the central bank matures.

Re-establishing bonds between national central banks and the people is crucial in times of high inflation. To this end, banks should cut out unnecessary tasks, free up their capabilities, focus only on their core tasks, and launch comprehensive public awareness campaigns. But unless central banks take responsibility and learn from their past mistakes, they will not be able to restore their credibility and public confidence.

Unfortunately, central banks seem unwilling to engage in this necessary process of self-reflection. So far, the RBA has only acknowledged its past policy mistakes and taken steps to raise the pace of its citizens’ participation. Other central banks should follow Australia’s lead – and hope that the damage from their past mistakes can be repaired.

* Jürgen Starck is a former member of the Executive Board and Governing Council of the European Central Bank, former Deputy Governor of the Deutsche Bank and Professor Emeritus at the University of Tübingen.