25 October 2012

Carlo Bastasin: The force of realism

Draghi's pragmatic approach with the Bundesbank/Bundestag has its merits but there are limits beyond which choosing realism over principles should not venture, comments Bastasin in his Il Sole 24 Ore article.

For the whole summer, the Bundesbank relied on political protest to undermine Draghi’s consensus [on OMTs]... The main German newspapers accused him, very impolitely, of serving the interest of Italy at the expense of Germany—a common opinion in the latter. Another German parliament member accused Draghi of being ready to lend money in exchange for old bicycles. Finally, after the OMT announcement, the credibility of the ECB, and of its president, plunged. Without the consensus of the public and its representatives at the Bundestag there was a risk that Berlin, sooner or later, would run out of the political resources to rescue the eurozone.

As on other occasions during his short yet dramatic presidency, Draghi decided to intervene in a pragmatic fashion by facing the political world despite the many legitimate reasons not to. In fact, when Draghi first announced his intention to address the German parliament, the most attentive observers were puzzled. By law, the ECB is responsible towards the European Parliament, not the national ones. For as much as one can doubt the effectiveness of the Strasbourg assembly in terms of representing European citizens, assigning a role to a national parliament means breaking the institutional setup of the European Union, without which any “sovereignty proxy” to a common institution does not stand.

Moreover, there is no reason why the Bundestag should be entitled to a justification more than, say, the Italian or the Slovak parliament. Hence, in theory Draghi should go deliver his explanations to every capital in the euro area that requests them. Finally, monetary policy is not under the exclusive jurisdiction of the ECB but is strictly protected from government influence. Being a general-interest-type policy, it particularly should not be discussed on the basis of a single national interest. Not by chance, European treaties and protocols precisely regulate the relationships between the central bank and other institutions.

However, as he did previously—successfully, one should add—Draghi decided to let pragmatism prevail over principles. He had timing on his side as, for the first time, the Bundesbank itself—as we anticipated—forecasts a trimester of negative GDP, even for Germany. Germans will feel, for the first time on their own skin, the risk of a recessive downward spiral, and its politicians will feel, even more, the risk of voters’ rejection in the upcoming September 2013 federal election.

There are limits, however, beyond which choosing realism over principles should not venture. In August, for instance, again for the sake of pragmatism, the ECB accepted the rule according to which the purchase of public bonds could occur only on the basis of a condition agreed upon by national governments. It was a request from Berlin, but yesterday the same ECB subordination to government decisions was reproached by Draghi to the Bundestag commission members he was addressing. In this case it was evident that “principles” are not only important per se, but also as a defence and a legitimation of the conduct of non-electoral institutions.

Finally, Draghi’s visit to the Bundestag represented yet another demonstration of how the European political centre of gravity has shifted from Brussels (or Strasbourg) to Berlin. After slipping into a search for solutions to the crisis—again because of misplaced pragmatism—which leaned towards intragovernmental negotiations rather than supranational ones, now we are moving to solutions that first of all must be accepted by a single nation. Pragmatism means accepting the force of reality, but one must be careful not to bend under the reality of force.

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