Important Drivers of European Monetary Integration The Game Between the German Central Government and the Bundesbank as an Example

Abstract

An independent central bank constitutes a veto actor in the political process itself and has the potential to limit the autonomy of the State (Government). In cases where the preferences of the state and the central bank diverge, the resulting authoritative actions will be influenced by the political structure of the respective country. Where changes in the domestic political system are difficult to achieve, the state can change the existing equilibrium between the central bank and the government by engaging in international regimes and international negotiations and evolving this equilibrium in the direction of greater state autonomy. This paper adopts a case study approach to propose a domestic political logic for international monetary policy choices by analyzing the relationship between international monetary co-operation, central bank independence and national autonomy, and uses the political game between the central central bank and the central government within Germany and the outcome to verify this view, thus providing a political science explanation for the relationship between German monetary politics and European monetary integration. The European Central Bank after the formation of the Union inherited the independence of the German central bank, and while assuming its responsibility for monetary stabilization and economic development, it gradually transcended the scope of its monetary functions and transformed itself from a purely technical institution to an important political player in the regional political and economic arena in the process of the already existing institutional constraints and changes in the economic situation.