2012-09-11 04:24:46
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.