21 December 2011

Stewart Fleming: ECB at the centre of the euro storm

Writing for European Voice, Fleming says the European Central Bank is not immune to the growing tensions between Member States over the eurozone crisis. It is still struggling to avoid being pitched into the inappropriate role of lender of first and last resort to troubled sovereigns.

The already fraught outlook for the European political economy has sharply deteriorated again in recent weeks. The deterioration reflects not just the damage to business and consumer confidence inflicted by a fragile banking system that has severe difficulty funding itself from private markets, but also political conflicts among European Union Member States. Significantly, these stresses are threatening to transform the culture of the European Central Bank (ECB) – for the worse.

A changed ECB

The ECB was established as an institution whose stability-focused monetary policy philosophy was deeply entrenched legally, in the EU's treaties, and operationally in its monetary policy strategy. It cherished its apparent cohesion in pursuit of these objectives, while successfully shrouding any divisions behind a cloak of secrecy.

Since May of last year, however, it has become an institution whose divided governing council now votes on vital issues. We do not know, but it is reasonable to assume, that more frequently these divisive votes reflect the priorities of the politicians and elected governments whose central banker is sitting at the ECB table. If so, this is yet another manifestation of the rise in the EU of inter-governmental nationalism, this time in an institution that was meant to take a eurozone-wide view of its role.

Since each country has one vote (much though Germany would want it, there is no qualified majority voting in the ECB yet) Greece's or Portugal's voice carries, in principle, the same weight as Germany's. So it is possible, and, as economic conditions deteriorate, increasingly likely that, in Holtrop's terminology, the crickets can outvote the ants.

It is not paranoia about historical inflation, but more – as Jürgen Stark, a departing member of the ECB's executive board, hinted this week – fear about the future of the ECB's treaty-enshrined mandate that is helping to shape Germany's hard line on the ECB's role in supporting Italy, Spain or other troubled eurozone sovereign borrowers through its Securities Markets Programme. And Germany is right.

Right, not just because of the treaty's ‘no bail-out' provisions, but also for reasons of practicality and democratic legitimacy. In the case of Italy, for example, the ECB is the wrong institution to play a leading role in providing emergency financing and in monitoring the economic policy conditions that it is expected to fulfil in return. This is a job for elected eurozone political leaders and, at the request of the sovereign debtor, the IMF. Moreover, once the ECB is ensconced as the prime lender of last resort to eurozone sovereign debtors, the pressure to reform eurozone economic governance to enforce fiscal discipline would abate.

If the December summit had come up with an ambitious eurozone economic governance package together with internationally-financed, IMF-led support for EU sovereign debtors in trouble, then perhaps the ECB might fairly have been expected to provide more help to troubled eurozone governments, by buying more Italian or Spanish government bonds in the secondary market. This could then have been presented, credibly, as an extension of its monetary-policy role.

But the summit was half-baked. Expectations of a decisive breakthrough were raised too high, not least by Olli Rehn, the European commissioner for economic and monetary affairs and the euro, and, surprisingly, by ECB President Mario Draghi himself, at least initially.

The summit left the eurozone's governance regime uncertain: vulnerable members are still at the mercy of financial markets without the legitimate support that the IMF could provide: and the ECB is still struggling to avoid being pitched into the inappropriate role of lender of first and last resort to troubled sovereigns, the outcome that France wants.

Full article (EV subscription required)

© European Voice