EU integration and Central Bank Independence: Is Ukraine Taking a Unique Path?

First, the founding of the EU, with plans to introduce a common currency, the euro, assumed that the Union’s central bank (the future ECB) would have the highest level of independence to ensure price stability and completely eliminate the possibility of influencing its policy in such a way that some countries could benefit from the ECB’s monetary policy at the expense of others. In the early 1990s, the requirements to strengthen the independence of central banks in the countries forming the EU seemed radical, but they are now considered standard.

Second, EU membership implies that a country shares the values of the Union, including those underpinning its economic policy (Acquis Communautaire). This extends to monetary policy, financial stability policy, banking supervision, and financial monitoring—in other words, the entire range of issues within the competence of central banks. It is clear that the absence of political interference in the work of regulators and the establishment of robust safeguards against their “privatization” by politicians or business groups are fundamental to ensuring that the economy of an individual country within the common market does not get incentives that distort competition or undermine the single market idea. This applies to both goods markets and financial services markets.

Third, in Ukraine, the independence of the National Bank cannot be considered an established principle. The removal of the National Bank from initially populist and later oligarchic control was achieved thanks to a small group of Ukrainian reformers and the firm stance of the IMF. Unfortunately, calls for the National Bank to focus more on economic growth and sometimes even finance the government or enterprises still persist in Ukraine. This raises concerns of whether Ukraine truly shares the Acquis Communautaire values at the level of macroeconomic culture.

The review of domestic legislation for compliance with EU membership requirements has already begun. Cluster 3 of the negotiation process focuses on economic policy and regulatory practices. The status of the National Bank of Ukraine is being scrutinized closely within this cluster. Currently, the NBU’s independence does not meet EU standards (see Figure 3). Nevertheless, some interest groups aim to reduce this independence, seeking a return to the times of inflationary devaluation or regulatory rent-seeking.

How has the formal status of central banks evolved during the process of European integration, given that the relevant requirements are a core component of the Maastricht convergence criteria? Let us consider the legislative independence index of central banks, Romelli’s cbie_index, which combines the popular GMT and CWN indices (GMT from Grilli, Masciandaro, and Tabellini, and CWN from Cukierman, Webb, and Neyapti). Figures 1 and 2 show that European integration strengthened the independence of central banks. Moreover, in the “old EU” countries, monetary institutional reforms were significantly more radical compared to post-communist countries.

The process of increasing the independence of central banks in the "old EU" countries began with the signing of the Maastricht Treaty in 1992. In post-communist countries, this process initially aligned more closely with the logic of market transformation, while the issue of European integration became relevant later. In the early 1990s, central banks in post-communist countries were more independent than those in the "old EU," as their central banking legislation was developed at a time when the importance of independent monetary regulators was already academically recognized. In contrast, the legislation in the "old EU" reflected the historical trajectory of macroeconomic policy institutional development. This is clearly illustrated by the data in Figure 2: the variation in central bank independence levels in the "old EU" in the early 1990s was significantly higher than in post-communist countries. 

Over time, the situation changed. Preparation for the introduction of the euro increased the independence of central banks in EU member states, while in Central and Eastern European countries, it remained unchanged for a long period. After achieving some success in macroeconomic policy reforms, incentives to strengthen the independence of monetary authorities weakened. Each country established a specific institutional balance of power concerning the status of its central banks. However, preparations for EU accession provided a significant impetus to substantially increase central bank independence (Figure 1). Notably, the strengthening of this independence by the time of accession was more radical compared to the reforms undertaken by the "old EU” members immediately after joining. This contributed to a marked increase in the uniformity of central bank independence levels within the "old EU" during the introduction of the euro (Figure 2). In contrast, significant variation in the relevant index persists among post-communist countries compared to the "old EU." However, even this variation has decreased under the influence of European integration. 

The above discussion leads to several additional considerations. The understanding of central bank independence evolves over time. Consequently, each subsequent screening of legislation will incorporate new formal requirements reflecting updated perspectives on this issue. EU membership allows for a more flexible interpretation of legislation compared to eurozone membership, enabling discussions with the European Commission to adopt a more flexible approach. However, this flexibility applies to specific nuances rather than fundamental principles. More importantly, the Acquis Communautaire is less about the formal revision of legislation and more about a country’s maturity in understanding and implementing shared principles.

How does the formal assessment of the NBU’s independence look in the context of European integration processes? Figure 3 shows that during the initial period of market transformation, the NBU’s level of independence was significantly lower than the average for Central and Eastern European countries. Unsurprisingly, this contributed to hyperinflation in the mid-1990s. After the adoption of the Law on the NBU in 1999, the situation improved significantly. However, subsequent amendments to this law in 2008, 2015, and 2021 did not affect the respective index. 

Figure 3 also shows that the movement of post-communist countries toward the EU led to  strengthening of central bank independence to a level higher than what the NBU currently has. In other words, any political speculation suggesting that the NBU's level of autonomy is excessive contradicts both the letter and the spirit of the European integration process. For the reform agenda, this implies that further changes to the legislation on the National Bank of Ukraine can be expected.

Since the NBU’s level of independence today is higher than that of the “old” EU countries in the 1990s, the changes to legislation are unlikely to address fundamental issues. However, procedural questions or technical details may need clarification. The overall set of well-crafted legislative norms will determine not so much the formal level of a particular index but rather the institutional resilience of the NBU to political pressure. 

Fostering the institution of central bank independence is not only the responsibility of politicians—who would often prefer the opposite (not just in Ukraine)—but also of society as a whole and the regulator itself. Without transparency and accountability, independence quickly loses legitimacy and becomes an easy target for populists. This is not merely about formal compliance with EU requirements; it must become a fundamental element of the social contract, the content of which is currently taking shape in the context of European integration.

Conclusions

European integration directly influences the strengthening of central bank independence. Without the requirements of European integration, such independence would likely remain confined to the institutional trajectory of historical circumstances or past political balances.

The trajectory of increasing central bank independence in the "old EU" and in Central and Eastern European countries differs. As the understanding of central bank independence evolves, the process of legislative review for EU compliance will increasingly incorporate updated approaches. 

European principles of economic policy and participation in the common market extend beyond the formal legislation governing central banks to include adherence to the principle of independence for monetary regulators. The current level of NBU independence does not align with the EU best practices, suggesting that further changes to the relevant legislation can be expected.

Most importantly, establishing the institution of de facto independence for the NBU must become a part of the social contract on the path to full EU membership.