💾 Archived View for gmi.noulin.net › mobileNews › 4143.gmi captured on 2022-06-11 at 22:49:14. Gemini links have been rewritten to link to archived content
⬅️ Previous capture (2021-12-03)
-=-=-=-=-=-=-
Sep 7th 2012, 14:49 by A.L.G. | BRUSSELS
WHEN European leaders declare that they will do whatever is necessary to
protect the euro zone, most people just yawn. But when Mario Draghi, president
of the European Central Bank, said the same in July, everybody took notice.
This week plaudits (and some protests) have been showered on Mr Draghi after he
confirmed on September 6th (over the explicit objections of Germany's
Bundesbank) that the ECB would resume buying the bonds of troubled countries on
strict condition that stricken countries submit to formal, externally monitored
reform programmes. (The details are here, the transcript of the press
conference is here and the assessment of my fellow Economist blogger is here).
Often in the crisis the ECB has appeared to be the only thing standing between
the euro and the abyss. This has brought it ever greater influence. The
proposed new banking supervisor for the euro zone will be an offshoot of the
ECB (see my column this week, Eurobankingfragilistic). Moreover, the ECB's
officials are part of the troika that monitors and enforces countries'
compliance with their bail-out conditions. And when it comes to the future of
the euro zone, Mr Draghi has become the most explicit of the four presidents
(of the ECB, the European Council, the European Commission and the Eurogroup of
finance ministers) who are drafting a road map for future integration (their
first report is here)
All this raises a question: is the ECB becoming too powerful? Is it straying
too far from a central banks role of setting interest rates and controlling
inflation? Is it becoming too overtly political?
Figures close to the ECB argue that, at a time when Europe is confronting its
greatest economic crisis since the second world war, European institutions must
respond with the imperfect means at their disposal. The European Union, or even
the euro zone, is not a federal state. So it is up to the most integrated parts
of it to show leadership.
That the ECB should take such a central role is in many ways a reflection of
the failure of the euro-zone s political leaders to bring the debt crisis under
control in more than two years of emergency summits and bail-outs. There
reasons are many: publics are reluctant to give up sovereignty and share risks
to the degree needed to stabilise the currency; parliaments are reluctant to
give out taxpayers' money; debtor states are resistant to demands for ever more
austerity. None of Europe s leaders except Germany's chancellor, Angela Merkel
and probably not even her can resolve the crisis alone. Yet every leader can
place obstacles in the way of solutions. So progress, when it takes place, is
measured in haphazard half-steps, which never quite satisfies investors who
want certainty.
Mr Draghi is in an entirely different position. Whereas politicians must raise
money from taxpayers, the ECB can in theory print unlimited quantities of the
stuff. As an independent central banker he is accountable to no government or
parliament only to other unelected central bankers in the ECB's governing
council. The only real obstacle is the Bundesbank's chief, Jens Weidmann. But
in a body where Germany has the same vote as Greece, Mr Weidmann can easily be
outvoted as he was this week. Despite his denunciation of the bond-buying plan,
Mr Weidmann shows no sign of resigning in protest.
Mr Draghi is supposed to rise above base politics, yet he takes part in every
European summit. His public pronouncements are studied like Greek oracles. The
high priest of Europeanism does not officially negotiate with leaders. But Like
Jean-Claude Trichet before him, he sends messages to political leaders from the
top of the Eurotower in Frankfurt, listens for a response and then pronounces.
Last December Mr Draghi spoke vaguely of the need for a fiscal compact and,
lo, leaders agreed to a new treaty enshrining balanced-budget rules. Mr Draghi
then sprayed the banks with 1 trillion worth of cheap money.
Now Mr Draghi is setting conditions more explicitly. Forget light forms of
conditionality. The ECB said it would resume its dormant bond-buying programme
only if two conditions were met. First, countries needing help must ask for it
and submit to a fully-fledged programme agreed and monitored by European
institutions (and preferably by the IMF too). Second, the rescue funds should
start buying bonds in the primary market. This could be done by the temporary
European Financial Stability Facility, or the new improved European Stability
Mechanism that should soon enter into force, pending a ruling by Germany's
constitutional court on September 12th.
In the past, the ECB s conditions would be spelled out in secret letters, for
instance when the ECB started buying Italian bonds last year (see my earlier
blog post here). Now the ECB wants the conditions to be made explicit by
governments. Bond-buying would end when the (unspecified) objective had been
achieved, says Mr Draghi, or if the country in question breached the terms of
its reform programme.
Mr Draghi, then, is not going to stand in the front line wielding the ECB's big
bazooka. But if others man the trenches, he will provide artillery support from
the rear to avert a catastrophe. Mr Draghi himself uses a different image: the
response to the crisis has to stand on two legs . ECB action without reforms
would be ineffective. But he also acknowledges that reforms by governments are
taking too long to bear fruit and need to be supported by the ECB.
Mr Draghi justifies his action with the argument that high yields faced by
southern European governments are not only the product of a higher credit risk,
but also the result of markets' unfounded fear that the euro would break up.
The former is a matter for governments, but the risk of currency redenomination
is the ECB's business because it impedes the transmission of monetary policy .
It is an appealing argument, but hard to put a number on the extra interest
countries are paying because of the convertibility risk.
Nevertheless, Mr Draghi insists the euro is irreversible. The ECB's
intervention in the market is aimed at removing the tail risk of a break-up.
At his press conference a journalist cheekily asked why it was Mr Draghi's job
to ensure the euro s irreversibility. By what authority could he decide what
currency countries should use? Mr Draghi offered no real answer.
Even if one accepts the premise that saving the euro is part of the ECB's
mandate, Mr Draghi is straying into awkward territory. The ECB's independent
action has been made dependent on fickle politicians. At least indirectly, Mr
Draghi will be bargaining with governments over the terms of their reform
programme.
To the irritation of the ECB and Brussels institutions, the Spanish prime
minister, Mariano Rajoy, has prevaricated for weeks over whether to seek more
assistance, declaring he would wait to see the ECB's terms before deciding
whether to ask for help. What if Mr Rajoy takes the money but is later deemed
to have missed its targets for reform? If Mr Draghi really cuts off a country
like Spain, he would surely be calling into question the future of the euro
after all.
There are other worries. Next week the European Commission will propose placing
all of the euro zone's 6,000-odd banks under an ECB-directed central
supervisor. Many worry that, despite the attempt to place a Chinese wall
between the supervisory and monetary roles, the ECB's hallowed independence
will become compromised by taking on the huge new task. Can the ECB really
separate its decisions on inflation-fighting from its growing role in ensuring
financial stability? Perhaps more importantly, would the ECB s reputation for
competence survive a major failure of supervision?
Then there is the question of how to fix the design flaws of the euro zone. An
article written by Mr Draghi last month for the German daily, Die Zeit, caused
much excitement because the mention of exceptional measures seemed to confirm
that the bond-buying programme would be restarted.
In fact, most of the piece set out Mr Draghi s vision for the economic and
political integration of the euro zone. It is not just the currency that should
be irreversible, he said, but also the whole historic process of European
unification . In his view, stabilising the euro would require political
integration that stops short of a full federation.
...this new architecture does not require a political union first. It is clear
that monetary union does entail a higher degree of joint decision-making. But
economic integration and political integration can develop in parallel. Where
necessary, sovereignty in selected economic policy fields can and should be
pooled and democratic legitimation deepened.
How far should this go? We do not need a centralisation of all economic
policies. Instead, we can answer this question pragmatically: by calmly asking
ourselves which are the minimum requirements to complete economic and monetary
union. And in doing so, we will find that all the necessary measures are firmly
within our reach.
For fiscal policies, we need true oversight over national budgets. The
consequences of misguided fiscal policies in a monetary union are too severe to
remain self-policed. For broader economic policies, we need to guarantee
competitiveness. Countries must be able to generate sustainable growth and high
employment without excessive imbalances. The euro area is not a nation-state
where persistent cross-regional subsidies have sufficient popular support.
Therefore, we cannot afford a situation where some regions run permanently
large deficits vis- -vis others.
For financial policies, there need to be powers at the centre to limit
excessive risk-taking by banks and regulatory capture by supervisors. This is
the best way to protect euro area taxpayers. There also needs to be a framework
for bank resolution that safeguards public finances, as we see in other
federations. In the U.S., for example, on average about 90, mostly smaller,
banks per year have been resolved since 2008 and this had no impact on the
solvency of the sovereign.
Political union can, and shall, develop hand-in-hand with fiscal, economic and
financial union. The sharing of powers and of accountability can move in
parallel. We should not forget that 60 years of European integration have
already created a significant degree of political union. Decisions are made by
an EU Council filled by national ministers and by a directly elected European
Parliament. The challenge is to further increase the legitimacy of these bodies
commensurate with increasing their responsibilities and to seek ways to better
anchor European processes at the national level...
It is hard to imagine any other central banker setting out such a detailed
political blueprint for economic and constitutional reform. Then again, the ECB
is no ordinary central bank and these are no ordinary times. In a crisis it may
make sense for a trusted figure to offer direction, even to take risks. But it
is not a role that an unelected central banker can play for too long.