19 April 2012

Paul N Goldschmidt: Making the ECB the cornerstone of European integration is both a trap and an opportunity!

The message conveyed to the uninformed citizen is that the limitations of the ECB’s interventions are primarily the consequence of its independence, enshrined in the Maastricht Treaty, and therefore “self imposed” by a Board of Governors lacking any political legitimacy.

By simply calling for the ECB to change its mandate to include “promoting growth” in addition to “price stability”, politicians like to believe that they have provided the solution that will allow the ECB to behave like any other Central Bank in support of  - or in coordination with - their respective national governments.

This over-simplification is totally misleading, because, within the existing Treaty framework, it is obviously impossible for the ECB, charged with implementing a single EMU-wide monetary policy, to support or coordinate with 17 national sovereign governments simultaneously. The recent steps taken to remedy this weakness (“six pack” – “two pack” – Treaty on budgetary discipline – EFSF/ESM etc.) are all useful and necessary steps but fall short of a structure that would permit the ECB to act as a fully-empowered Central Bank.

One should also acknowledge that the ECB, under both Presidents Trichet and Draghi, has interpreted its mandate with enormous flexibility by engaging in “non-standard” policy measures, such as the purchase of government bonds (SMP) to “smooth the transmission mechanisms of monetary policy” or, more recently, with the € one trillion LTROs to avoid bank (and indirectly government) refinancing problems.

These bold policy initiatives must be accompanied by the adoption, implementation and “enforcement” of the structural reform measures promised by EMU governments as their contribution to the bargain which enticed the ECB to intervene in urgency. Failing to do so, while continuing to ask the ECB to act as the lender of last resort and as sole rampart against a financial collapse, will only postpone the day of reckoning. The short term impact of the ECB’s interventions is already proving the imbedded fragility of the system and requires far deeper reforms if financial markets are not to become the final arbiter of the crisis, despite the empty rhetoric of populist politicians.

Authorities should also recognise that there are practical boundaries, within the present Treaty framework, to the so-called “unlimited” capability of the ECB to print money. Already at present, the total of the ECB’s balance sheet represents some 30 per cent of the eurozone’s GDP compared with that of the Federal Reserve Bank which represents “only” 15 per cent of US GDP. This measure should be all the more taken into account that – unbeknownst to the public at large as well as to the great majority of officials – the balance sheet of the ECB is (together with the EU budget at Union level) the only real expression of a mutualised liability between the 17 EMU Member States. We must be already very close to the prudential limits of such backdoor hushed “solidarity”, and the ECB should resist any pressure to expand unilaterally its liabilities.

It is therefore hardly surprising that, unless there are further deep reforms in EMU economic and financial governance, it will be impossible to reach a consensus limited to the revision of the ECB’s mandate. Those who are advocating such a revision should be aware that reaching agreement means accepting from the outset further pooling of sovereignty on a scale comparable to the pooling of monetary sovereignty. Failing to recognise this inescapable reality will at some point allow the “Euro trap” to close, bringing down with it not only EMU but the EU itself.

However, the recognition by the body politic of the ECB’s role and of its unquestioned status as “the only EU institution” capable of providing a solution to the crisis should be looked upon as a unique "opportunity” to promote the necessary further integration of the eurozone. Indeed, the ECB’s independent and supranational character (as opposed to intergovernmental) is a testimony to the success of its federal-like structure, and this needs to find its equivalent on the level of economic fiscal and social policies within a well-functioning monetary union.

The amendment of the ECB’s mandate is essential to achieve these goals but it must be subordinated to a fundamental structural reform of the EMU’s governance. It is only when the ECB will find itself facing a single “partner” that a meaningful and productive dialogue can be established aiming at the support of politically mandated objectives. These should include the possibility of financing a centralised EMU debt office (rather than individual Member States), the conduct of a deliberate exchange rate policy (similar to that engaged by the FRB, the BoE, BoJ, or China) and more flexibility in the “price stability” mandate to allow greater consideration to be given to other policy objectives such as growth and employment.

The ball is squarely in the court of the Government Authorities which alone have the legitimacy to reform the EMU and create a suitable environment for the ECB to deploy the full range of its capabilities.

Paul N Goldschmidt, Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute

Tel: +32 (02) 6475310 / +33 (04) 94732015

Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be

Web:www.paulngoldschmidt.eu

© Paul Goldschmidt