For years, the European Central Bank has been succumbing to political interests and pursuing objectives beyond the scope of its primary mandate: maintaining price stability. But now that inflationary pressures are building, the ECB’s credibility is on the line.
Our fiat money regime requires an institutional anchor that
credibly and decisively ensures a stable price level and long-term
confidence in the euro. Credibility is a central bank’s greatest asset,
because it underwrites confidence in the purchasing power of money. And
credibility, in turn, rests on the central bank’s independence from
political influence, and on its commitment to monetary stability.
Viewed in this light, the European Central
Bank has been in dangerous waters for several years. It has jeopardized
its political independence and compromised its primary objective.
Actions that are clearly intended to anticipate political pressure leave
no doubt that it has exceeded its mandate. For example, during the euro sovereign debt crisis that began in late 2009, the
ECB actively participated in the
restructuring of Europe’s Economic and Monetary Union (EMU).
With its Security Markets Program, it abandoned important monetary-policy principles, including the ban on monetary financing of government debt and the requirement of a single monetary policy
for the eurozone. The ECB also took a leading role in rescuing EU
member states hit hard by the crisis, even though this was the
respective national governments’ responsibility. The boundaries between
monetary and fiscal policy thus were deliberately blurred, leading to
close coordination between the two. With then-ECB President Mario Draghi’s unilateral commitment to “do whatever it takes to preserve the euro,” the ECB set itself up as lender of last resort for the eurozone.
The attempt to attach conditions to this role in the ECB’s “outright monetary transactions” program failed. Indeed, the program was never activated, and has since been replaced by the Asset Purchase Program and the Pandemic Emergency Purchase Program.
By purchasing government debt, the ECB has fundamentally distorted bond
markets, arguing that it is trying to prevent market fragmentation. But
now that risk premiums have leveled out and market access with
favorable conditions has been secured for all eurozone member states,
governments have an incentive to increase their already exorbitantly
high public debt levels. Highly indebted states such as Italy and France
presumably will rely on this safeguard indefinitely. Worse, the ECB’s operations exceeding the limits of EU treaties and statutes have intensified during Christine Lagarde’s presidency. Invoking “secondary objectives,” the ECB has committed itself to promoting a “green transformation.”
The ECB wants to help improve financing conditions for “green” projects
and ensure that the collateral and bonds it accepts are environmentally
“sustainable.”
Project Syndicate
© Project Syndicate
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