The Federal Reserve stood its ground and left its benchmark interest rate unchanged at May’s meeting, defying pressure from US President Donald Trump to lower rates. But the pressure on the US central bank’s independence has not gone unnoticed, and has left many pondering whether a similar scenario could play out in Europe.
Since returning to the White House in January, Trump has repeatedly attacked the chair of the US central bank, Jerome Powell, for not lowering interest rates more quickly, as US growth slows and global trade tensions rise. Although Trump has ruled out laying off Powell, mere speculation about such a political intervention at the Fed has rattled financial markets and reopened questions about the true independence of central banks. Could such a scenario materialize in Europe?
How the ECB Is Shielded from Political Interference
On this side of the Atlantic, central bankers are watching closely. François Villeroy de Galhau, governor of the Banque de France, praised Powell’s courage in an interview with French website Boursorama: “A central banker must tell the truth independently and that is what he did … I salute his professionalism and courage,” he said.
Yet unlike the Fed, the ECB is almost impossible for any one political figure to influence.
“The primary reason that ECB president Christine Lagarde could not be threatened in the same way that Powell has is down to the election process,” says Michael Field, chief European market strategist at Morningstar. “In the US, the president alone, with the consent of the Senate, appoints Fed members. In Europe, ECB members are elected by the European Council, which is made up primarily of heads of states, so the power is more widely distributed.”
And there are many heads of state. At present, the eurozone is made up of 20 countries.
“The Fed of course has other safeguards, one of which is the long terms—14 years—of its members,” Field continues. But the chair position in the US is just four years, compared with the eight-year, nonrenewable term at the ECB.
Lastly, the process for removing members is more onerous in Europe, Field adds. Members can only be removed for “incapacity or serious misconduct,” a high bar. “In the US, Fed members can be removed for ‘cause’, which appears to give presidents a wider scope. In saying this, no Fed or ECB board member has ever been fired,” Field says.
Trump has previously said the “termination” of Powell as Fed chair “cannot come fast enough,” raising fresh fears about political influence on America’s central bank. That, combined with Trump’s tariff announcements on April 2, triggered a sharp rotation out of global markets.
“It wasn’t solely the April 2 announcement of ‘reciprocal’ tariffs that triggered investors to rotate out of US dollar assets in a significant way. It was also the headline that the Trump administration was looking at ways to fire Chair Powell before his term as Fed Chair ends in February 2026,” says Karsten Junius, chief economist at Bank J. Safra Sarasin, in a research note on May 2. “It is a reminder that the independence of a central bank is an important pillar of trust that should not be gambled away lightly.”
According to Darius McDermott, managing director at Chelsea Financial Services, the bond market served as the ultimate watchdog.
“Thankfully, Trump—or at least the people around Trump—understand that you cannot mess with the bond market,” McDermott says. “His recent 90-day tariff pause was essentially a response to bond market instability.”
Despite these institutional and economic differences, the ECB and the Fed work closely behind the scenes, especially in times of global stress. They share information, coordinate liquidity measures, and have jointly managed dollar swap lines to ensure stability in global funding markets. Central banks work together especially in times of crises, such as in 2020 and further back in the global financial crisis.
How Are ECB Policymakers Appointed?
The president of the ECB is appointed by the European Council, following consultations with the European Parliament and the ECB Governing Council. The process is political, but widely distributed, requiring agreement among EU member states. Current president, Christine Lagarde, was managing director of the International Monetary Fund between 2011-2019. Her predecessor, Mario Draghi, was briefly prime minister of Italy after he left the ECB.
The rest of the ECB’s Executive Board (six members in total) is appointed the same way, and they serve alongside the 20 national central bank governors of the eurozone countries in the Governing Council, the ECB’s main policymaking body.
This diversity of voices creates its own challenges: hawks, who prefer stricter monetary policy and typically come from Northern Europe, frequently argue with doves from the south. But that same diversity of its setup also prevents any one government from steering ECB policy in its national interest.
The ECB Faces Other Challenges
But the ECB faces structural challenges that the Fed does not. The eurozone remains a monetary union without a full political, fiscal and capital market union, which makes monetary policy more complex, especially in times of crisis. Recall that the one of European Union’s founding principles, as set out in the 1957 Treaty of Rome, is “an ever closer union among the peoples of Europe”.
Some key challenges the ECB has voiced:
There’s no full banking union: While the ECB supervises eurozone banks directly through the Single Supervisory Mechanism (SSM), there is still no common deposit insurance scheme as a key part of the banking union.
There’s no common Eurobond market: Aside from temporary instruments like the NextGenerationEU recovery fund, there is no permanent system of joint fiscal capacity. Countries issue their own bonds, which means diverging borrowing costs—and limits to how effectively the ECB can stabilize the system in times of crisis.
There’s no capital market union
The EU still lacks a fully integrated capital market. National differences in tax law, regulation, and insolvency procedures continue to block the free flow of private investment across borders
Why Central Bank Independence Matters for Investors
Central bank independence is a pillar of market trust and financial stability. The world’s oldest Bank of England, which was created in 1694, achieved independence 303 years’ later in 1997; this autonomy has been challenged by politicians in recent years but has held firm. The current chancellor, Rachel Reeves, has previously worked at the Bank and has the political power to appoint its governor. She started her first budget speech by alluding to its independence and the cordial relations between government and the central bank:
“As a former economist at the Bank of England, I know what it means to respect our economic institutions. I want to put on record my thanks to the Governor of the Bank, Andrew Bailey and to the independent Monetary Policy Committee,” she said on Oct. 30, 2024.
As Sarah Hansen of Morningstar explains, doubts about the Fed’s credibility could lead to higher inflation and long-term interest rates, which raises borrowing costs for businesses and higher consumer costs. In addition, a politicized Fed could undermine faith in the United States among global investors as a destination for their capital (which the government relies upon to finance its debt).
As Morningstar’s Michael Field notes, institutional independence is a bedrock of credibility. The ECB’s structure, with distributed appointment powers and strict rules on dismissal, offers protection from political interference.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
