The European Central Bank’s staff union is taking the bank to court, accusing ECB management of trying to silence and intimidate its representatives in violation of the principles of European democracy. The case, lodged with the European Court of Justice on Oct. 13, marks the latest escalation in a battle between union representatives and management, where relations have deteriorated since Christine Lagarde took over as ECB president in 2019. The action contests a series of letters the bank addressed to the International and European Public Services Organization (IPSO) union and one of its senior representatives “restricting staff and union representatives from speaking publicly about workplace concerns, such as favoritism and the ‘culture of fear’ at the ECB,” the union said in a statement. These letters constitute “an unlawful interference” with basic freedoms guaranteed by the EU Charter of Fundamental Rights and the European Convention on Human Rights, the union said. “Freedom of expression and association are not privileges; they are the foundation of the European project.” An ECB spokesperson said the bank does not comment on court cases, but that it “is firmly committed to the freedom of expression and the rule of law, operating within a clear employment framework that is closely aligned with EU Staff Regulations and is subject to European Court of Justice scrutiny.” The first letter, signed by the ECB’s Chief Services Officer Myriam Moufakkir, came in response to an interview given by union spokesperson Carlos Bowles to Germany’s Boersen-Zeitung daily paper, published May 7. In it, Bowles had warned that a culture of fear may contribute to self-censorship, groupthink and poor policy decisions. The interview came at a time when the ECB’s failure to anticipate the worst bout of inflation in half a century had provoked widespread and public soul-searching by policymakers. It also followed a union survey in which around two-thirds of respondents said being in the good graces of powerful figures was the key to career advancement at the ECB, rather than job performance.   IPSO IS A FOUR-LETTER WORD According to the IPSO union, Moufakkir responded with a letter stressing that staff and union representatives must not make public claims of a “culture of fear” within the institution or its possible effects on ECB operations — including its forecasting work, which had come under especially intense scrutiny. It also accused Bowles of breaching his duty of loyalty under the ECB’s internal code of conduct, and instructed him to refrain from public statements that could “damage the ECB’s reputation.” A later letter by Moufakkir, addressed to IPSO dated Aug. 1 and seen by POLITICO, spells out the thinking. In it she stresses that the right of “staff representatives … to address the media without prior approval … applies exclusively to ‘matters falling within their mandate’. It does not apply to the ECB’s conduct of monetary policy, including its response to inflation.” In his interview, Bowles made no reference to current or future policy but rather to a work environment that he said fostered groupthink. Lagarde herself had warned against such risks, denouncing economists the previous year in Davos as a “tribal clique” and arguing that a diversity of views leads to better outcomes. Bowles had made similar statements to the media before, such as in an interview with the Handelsblatt daily paper published in January 2016, without eliciting any reaction from the bank’s management. Contacted by POLITICO for this story, the ECB said it had “stringent measures to ensure analytical work meets the highest standards of academic rigor and objectivity, which are essential to the ECB’s mandate of price stability and banking supervision.” Moufakkir suggested that Bowles’ comments undermine trust in the ECB and that this trust is crucial if the ECB is to deliver on its mandate. “Freedom of expression, which constitutes a fundamental right, does not override the duty of loyalty to which all ECB staff are bound,” she argued. Bowles rejected that framing, arguing in a letter to Moufakkir that he had a “professional obligation” to address such issues and their impact on the ECB’s capacity to fulfil its mission. PAPER TRAIL The trouble, according to the union, is that Moufakkir addressed the first two letters to an individual union representative (Bowles) who was speaking on its behalf, effectively undermining the union’s collective voice.  In her email, the union said, Moufakkir also “heavily misrepresented” Bowles’s comments and accused him of misconduct without affording him a hearing. In her letter from Aug. 1, Moufakkir maintained that her original letter to Bowles “was not a formal decision” to be recorded in his personal file, but rather a “reminder and clarification of applicable rules.”  “Its purpose was not to intimidate or silence Mr Bowles but to highlight to him the importance of prudence and external communications about ECB matters,” she wrote. The union said it sees this framing as an effort by the ECB to shield itself from judicial review: the letter addressed to Bowles was marked ECB-CONFIDENTIAL and Personal, conveying the impression of an official document. According to a person familiar with the matter, a special appeal launched by Bowles to the executive board to retract Moufakkir’s instruction has since been dismissed — without addressing its substance — because the letters had no binding legal effect and were therefore inadmissible. That has now prompted the union to turn to the ECJ; a response to a second appeal by Bowles remains outstanding. The union said that what it perceived as attempts by the ECB to silence union representatives have succeeded: Previously scheduled media interviews have been “cancelled due to fear of retaliation.” When contacted for comment, Bowles declined, citing the same reason. WHAT COMES NEXT? The ECB will have two months to submit its defense to the court. As an EU institution, the ECB is neither subject to German labor laws nor to similar rules in other EU member states and instead enjoys extensive scope to set and interpret its own rules. Out of 91 employment-related court cases since the bank’s inception, the ECB has won 71. Regardless of the legal implications, the union warned that the ECB’s approach undermines its institutional integrity and damages its credibility.  “Silencing staff representatives or whistleblowers prevents legitimate issues from being addressed and erodes trust in the institution,” it said. “Reputation cannot be protected by censorship — it must be earned through sound governance, transparency and open dialogue.” It sees the letter as part of a broader pattern in which the ECB has sought to restrict trade union activity and control staff representation, including planned changes to a representation framework that would limit the participation of union members in the ECB staff committee. IPSO is the sole trade union recognized by the ECB and holds seven out of the nine seats on the ECB’s staff committee, which is elected by all ECB staff. The ECB, for its part, has rejected much of the criticism emerging from survey organized by the union and the staff committee, which showed widespread distrust of leadership, surging burnout levels, and complaints about favoritism. The ECB has called the surveys methodologically flawed and unreliable.

Germany’s two banking supervisory agencies have drafted a plan to ease the burden of regulation on Europe’s smaller banks and are now seeing if it will fly. An informal discussion paper drafted by the Deutsche Bundesbank and Bafin — which share responsibility for supervising German banks — proposes freeing banks across the EU of the need to report capital ratios based on complex calculations of the riskiness of their assets, as well as liberating them from various other obligations. The proposals are the first concrete result of a drive to simplify regulation that began earlier this year and are the clearest sign yet that the EU is — belatedly — ready to undo some of the stifling financial regulation it introduced over a decade ago. Regulation is currently based on the global Basel III accords that were agreed by regulators in 2010, two years after reckless lending by U.S. and European banks caused the biggest financial crisis in nearly 80 years and a wrenching recession across most of the world. Basel III drastically increased the amount of capital and liquidity that banks have to hold to protect themselves against a possible repeat. But the accords were aimed primarily at big international institutions whose operations were capable of destabilizing the global financial system; as the impact of the 2008-2009 disaster has faded, regulators have grudgingly come to accept that their response went too far. The U.S., Switzerland and the U.K. have already implemented less intrusive regimes for smaller banks with simpler business models. “With the proposal for an EU small banks regime, we have provided important impetus to the discussions on simplifying the regulatory framework,” Michael Theurer, the Bundesbank’s head of banking supervision, said in emailed comments, stressing that the proposal “does not represent a departure from the Basel framework.” The framework would be open to banks with less than €10 billion in assets and with a mainly domestic focus (at least 75 per cent of their business should be in the European Economic Area). Banks using it would not be allowed to hold any cryptocurrency assets such as Bitcoin, and would be allowed to hold only minimal amounts of derivatives or assets for trading purposes. They would also have to prove that their vulnerability to changes in interest rates is acceptably low. ‘PARADIGM SHIFT’ Under the Capital Requirements Regulation, which applies Basel III in the EU, banks are generally required to report two capital ratios — one adjusted for risk, and one unadjusted. The latter, known as the leverage ratio, was originally intended as a backstop to prevent larger banks from gaming the system by understating the risks on their books under internal models allowed by the accords The German proposals suggest that smaller banks would merely have to report a leverage ratio, albeit a “significantly higher” one than the present 3 percent. By comparison, U.S. community banks must keep their leverage ratios above 9 percent, which means they must hold at least $9 of capital for every $100 in assets. Theurer said the Bundesbank had deliberately refrained from suggesting a specific ratio at this time. This idea “is more than a technical detail,” Daniel Quinten, a member of the board at Germany’s Federal Association of Cooperative Banks, said in a post on social media. “It would be a paradigm shift — and a chance for more proportionality, more efficiency and less bureaucracy in regulation.” The proposals — and the feedback they get — are to be incorporated in a report that a high-level European Central Bank task force will recommend to the European Commission at the end of the year. | Florian Wiegand/EPA The proposals also simplify demands on liquidity coverage. They would exempt banks from the Basel III Net Stable Funding Ratio — a complex formula for guaranteeing liquidity over a one-year timeframe — and would replace it with a new requirement that would limit their lending to only 90 percent of their deposit base. Banks would also have to keep at least 10 percent of their assets in highly liquid form, such as cash, central bank reserves or short-term government debt. This, the discussion paper said, “would achieve similar potential outcomes with dramatically reduced complexity.” The proposals — and the feedback they get — are to be incorporated in a report that a high-level European Central Bank task force will recommend to the European Commission at the end of the year. Additional reporting by Carlo Boffa.

U.S. Senator Elizabeth Warren has called for a former Trump-appointed banking regulator to be dismissed from the global financial watchdog, warning he is putting the world’s economic stability at risk. Randal Quarles, who was vice chair of supervision at the U.S. Federal Reserve from 2017 to 2021 where he oversaw a wave of deregulation, was last month chosen to lead a worldwide review of post-2008 financial crisis reforms for the Financial Stability Board. In a letter addressed to FSB Chair Andrew Bailey, obtained by POLITICO, Warren blamed Quarles’ deregulatory measures for the collapse of three U.S. banks including Silicon Valley Bank in 2023 and warned he would bring the same mindset to global standards. “Mr. Quarles spent his tenure as a top financial regulator in the United States weakening safeguards for megabanks at the expense of financial stability and the American public,” said Warren, a former U.S. presidential hopeful who is the most senior Democrat on the Senate banking committee. “It would be deeply troubling if this FSB review became a mechanism to coordinate the easing of post-2008 rules across the globe.” She said Quarles’ background “demonstrates that he is the wrong person to lead such a review.” She called on Bailey to “consider terminating the appointment and conduct your own search for a suitable replacement.” Bailey, who is governor of the Bank of England, became FSB chair after Quarles’ appointment. The warning came as the FSB, a global body that monitors and coordinates national financial regulations, issued new guidance on the regulation of nonbank financial groups, such as hedge funds. The guidance recommended capping the amount of borrowing these groups can do, but left up to national regulators to determine the details. ROLLING BACK SAFEGUARDS In the years following the 2008 global financial crisis, countries clubbed together and tasked the FSB with coordinating national regulators to prevent a similar crisis happening again. But in 2017, with momentum shifting back to deregulation, newly-elected U.S. president Donald Trump nominated Quarles to head up the Fed’s banking supervision arm. Warren’s main criticism of Quarles relates to his implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which gave the Fed discretion to apply tougher regulatory standards to large banks with assets of between $100 billion and $250 billion. “Under the law, Mr. Quarles had discretion to apply these rules … [but] he and other Trump-installed regulators refused to do so,” she said. She said Quarles also led the rollback of rules prohibiting banks from making “risky proprietary bets with customer deposits and from investing in or sponsoring hedge funds or private equity funds.” Both of these contributed to the collapse in 2023 of Silicon Valley Bank, she said. As well as calling for Quarles’ termination, the letter asks whether his appointment is an indication that the FSB sees “this review as an opportunity to coordinate the easing of post-2008 financial safeguards.” Neither Quarles nor the FSB immediately responded to a request for comment.

What’s wrong with this picture? The European Central Bank has warned banks to be on their guard against cyber-attacks from Russia and other authoritarian states. That same European Central Bank is also employing the daughter of a pro-Russian candidate for Moldova’s presidency — Alexandr Stoianoglo — as part of its banking supervision technology team. There is no suggestion that Corina Stoianoglo, the anti-EU candidate’s youngest daughter, has acted improperly in her work. Moreover, EU labor law prohibits discrimination against potential or actual staff on the basis of their political convictions. However, her position on the so-called Suptech team of the ECB’s supervisory arm, which focuses on “fostering a digital culture and delivering new supervisory tools and technologies” arguably places her in an especially sensitive spot. Corina took on her new role last month after previously completing a one-year traineeship at the ECB starting in the summer of 2023. She joined the team at a time when, according to the ECB, “the cyber environment has become more hostile than before owing to the aggressive acts of authoritarian states or cyber criminals linked to them.” Corina has not explicitly voiced any anti-EU political convictions, but she has supported her father’s campaign, applauding his commitment to better education in a campaign video. She has also acted as a channel for his campaign messages by allowing herself to be tagged in her uncle’s frequent posting of campaign material on Facebook. Maia Sandu accused him of failing to prosecute well-connected oligarchs who she said had looted the country under its previous president, Igor Dodon. | Daniel Mihailescu/AFP via Getty Images She has, however, taken down a message that she posted on LinkedIn earlier this month that included a picture of her and ECB President Christine Lagarde at an internal staff event. The post triggered a substantial reaction from LinkedIn users and Moldovan media, with site users expressing concern over a perceived “potential risk to the integrity and security” of the ECB. According to Romanian news site G4Media, Corina is able to work at the ECB because she, her sister and her father all hold dual Moldovan and Romanian citizenship. Ordinary Moldovans have no such rights because their country is not part of the EU. Moldova held presidential elections on Oct. 20, along with a referendum on EU membership. The pro-EU side won by a razor-thin margin, despite what its supporters alleged was a massive campaign of vote buying funded by Russia to derail the country’s accession effort. Stoianoglo, who supported a boycott of the EU referendum organized by pro-Russian parties, finished second in the first round of the presidential election with 26.1 percent of votes. He will face incumbent Maia Sandu, who won the first round with 42 percent, in a second-round runoff. The ECB doesn’t see a problem. “We are fully confident in our security checks on staff members,” an ECB spokeswoman said. Asked whether Corina had disclosed her link to a politically exposed person at the time of her interview, the ECB said Corina joined the bank in 2023, a year before her father became a presidential candidate. By that time, however, her father had already been suspended from his position as prosecutor-general amid allegations of abuse of office and corruption. Sandu accused him of failing to prosecute well-connected oligarchs who she said had looted the country under its previous president, Igor Dodon. Stoianoglo argued the charges were politically motivated. He was formally dismissed last year, but was acquitted of corruption charges earlier this year. In an embarrassing reverse for Sandu, the European Court of Human Rights ruled that his right to a fair trial had been violated. Corina Stoianoglo did not respond to a request for comment. Gabriel Gavin and Carlo Martuscelli contributed to this report from Brussels.  

BRUSSELS — A battle is brewing between Europe’s most powerful nations and the European Central Bank (ECB) over control of a new monetary tool that both sides fear could destabilize the continent’s banking system if mismanaged. At the heart of the conflict lies the digital euro — a virtual counterpart to euro coins and banknotes. For years, the ECB has been developing the instrument, envisaging a pan-European payment challenger with the ability to rival United States heavyweights like Visa and Mastercard. But as the project nears reality, a tug-of-war has erupted. Several European Union governments, including France and Germany, argue the ECB has gained too much control over one crucial aspect: how much digital currency citizens will be allowed to hold in “wallets” backed by the central bank. While it may seem like a dry technical issue, the stakes are enormous. Politicians and technocrats worry that if the limit is set too high, citizens could pull vast sums from traditional banks during a crisis, jeopardizing the stability of the entire banking system. Some are also concerned that any cap could infringe on personal financial freedom, stoking fears of a “Big Brother” state, according to one diplomat, who like others mentioned in this piece was granted anonymity to speak freely about a sensitive issue. The struggle is raising a fundamental question: Where does the central bank’s authority end and that of EU member countries begin? Thirty years after the ECB became the bloc’s chief monetary guardian, the clash is forcing a reassessment of the delicate balance between politics and central banking. For some, it’s a necessary pushback against the ECB’s overreach. But in Frankfurt, officials view it as political meddling in a realm that should be free of it. At its core, as one diplomat candidly put it, the dispute is less about technicalities and more about a “battle for power.” TECHNOCRACY VS. DEMOCRACY  Over 100 central banks have explored the idea of creating a national digital currency, spurred into action after Facebook’s ill-fated attempt to launch a global cryptocurrency, Libra, in 2019 sent shockwaves through the financial world.  While many of these efforts have since fizzled out, the ECB has remained resolute, championing the digital euro as a game-changing alternative to existing payment systems — one it hopes will loosen Europe’s dependence on dominant U.S. and non-EU payment services, which currently handle around 70 percent of EU payments.  But the central bank’s relentless advance has also spooked key member countries, which now view the project as dangerously technocratic. In Brussels, they’re leveraging their political influence in an attempt to curb the Bank’s power in ongoing negotiations over crucial aspects of the digital euro’s design. Under the draft regulation being worked on by lawmakers and governments, the ECB alone would decide how much digital currency citizens can hold in their wallets.   Frankfurt sees this as consistent with its vision of the digital euro as an expression of European monetary sovereignty. Moreover, officials familiar with the discussions point out that the central bank is the only authority permitted to adjust the money supply. However, at least nine countries disagree. Before the summer, a group that included Germany, France and the Netherlands argued that Frankfurt’s exclusive monetary competence should not be used as an excuse to “limit their decision-making power,” according to notes from a meeting shared with POLITICO. Under the draft regulation being worked on by lawmakers and governments, the ECB alone would decide how much digital currency citizens can hold in their wallets. | Kirill Kudryavtsev/AFP via Getty Images Diplomats further asserted “political supremacy” over the matter, explaining the digital euro was not just a monetary tool but a broader financial services matter that could reshape how Europeans handle everyday payments. The EU’s treaty gives the ECB very strong legal privileges on regulating money supply, but only qualified ones over banking supervision and payments. It also explicitly allows the Council of the EU and European Parliament to “lay down the measures necessary for the use of the euro as the single currency” — albeit “without prejudice to the powers of the European Central Bank.” FINANCIAL STABILITY, HANDED DOWN FROM ON HIGH Some member countries are also deeply concerned about how their citizens will receive a project devised by technocrats they suspect as being out of touch.  “You can create something in an ivory tower,” said one Brussels-based executive familiar with the discussions. “But will it actually be used in a market?”  Another area of concern is that allowing the ECB to set the limit would leave the institution with exclusive influence over a new tool that could have outsized effects on banking stability. The ECB argues that ensuring the soundness of banks is a core part of its supervisory responsibilities, given that such institutions are the main conduit through which it conducts its monetary policy. Many member countries, however, are not convinced. They argue it is the legislature that defines many of those supervisory responsibilities. They also don’t trust the ECB to cut slack with banks they feel it is their patriotic duty to protect.  But Frankfurt, along with the European Commission, has warned that allowing governments to set the limit could expose the independent central bank to political pressure, according to two people familiar with the discussions. Another European official worried that politicians might cave to popular demands to raise the limit, hurting banks. Ironically, many bankers also now side with the ECB, after it rolled out a number of features designed to reduce the threat to their businesses.  Stephen Cecchetti, a professor at the Brandeis International Business School, agreed that the digital euro was primarily a payment system infrastructure, but said the holding limit should be decided by the same people deciding if EU citizens can use €500 notes: the ECB’s Governing Council.  These kind of complaints suggest that “politicians don’t like the fact that the technocrats in their countries took this role,” he said, adding if they have an issue with that “they should complain to their central banks.” But member countries haven’t given up. One possible compromise is to let legislators set the parameters within which the ECB operates but to give the Bank the final say. Even so, that might not do much to resolve the broader worry — that a project intended to save Europe from the overarching economic dominance of U.S. tech now threatens to become a risk in its own right, should the ECB forge ahead without adequate democratic support.