Hungary’s new central bank act has led to outcry from the IMF, the European Central Bank, the European Commission and the National Bank of Hungary itself.
The act, rightly, is perceived as part of a broader power grab by prime minister Viktor Orbán from any institution or individual that serves as a check on government policy. It is also the latest in a series of attempts to undermine the current governor, András Simor.
However, some of the measures that the act proposes already apply to many of the major central banks.
It is not so much a case of what the act says, then. More what it signifies.
That highlights just how flimsy and susceptible to politicians’ whims central bank independence actually is.
Changes to the appointment process for senior officials are among the more controversial of the measures in Hungary’s act.
The maximum number of members of the rate-setting Monetary Council has been raised from seven to nine. Besides the governor and vice-governors, members are elected by parliament for six-year terms, as was the case before the act was passed at the beginning of this year.
The number of vice-governors is raised from two to three, and it will now fall to the prime minister, not the governor, to nominate vice-governors for presidential approval.
Of course this offers Mr Orbán more power to appoint senior officials.
But such powers have long been held by governments elsewhere.
In the UK, for instance, the chancellor of the exchequer nominates the four external members of the Monetary Policy Committee. And the appointment of the three most senior Bank officials, the governor and the two deputies, are made by the crown based on the recommendation of the prime minister and the chancellor.
That gives government a say in the appointment of seven of the nine members of the MPC.
In the US, the president nominates all seven members of the Federal Reserve’s board of governors, which make up the majority of the 12 voting members of the Federal Open Market Committee. The nominations must then be approved by the Senate.
The difference is that there is, for now at least, more support for central bank independence among the political elite in the UK and US than in Hungary.
Barack Obama’s nomination of Jerome Powell, undersecretary of the Treasury under George H.W. Bush, to serve as a governor on the Federal Reserve Board is evidence of this.
Given his track record, Mr Orbán is likely to be a little more partisan in deciding who sits on the Monetary Council. But so too is Ron Paul were he to end up US president.
As US academic Tom Cargill writes, central bank independence owes less to legislation and more to having the support of one’s political masters than is often thought.
Turnover of Fed governors has been high in recent years – of the current staff, only Ben Bernanke and Elizabeth Duke were there before Mr Obama took office.
With Mr Bernanke’s term as chair up for renewal in 2014 and Senate approval of Mr Powell and Harvard professor Jeremy Stein to fill the two vacant seats by no means certain, there is little in the Federal Reserve act that prevents it from finding itself exposed to similar pressures as its Hungarian counterpart is facing were an anti-Fed candidate to secure the presidency.