The ECB Needs to Know Its Place
The European Central Bank has far overstepped its mandate as a guardian of monetary stability. And a backlash is coming.
“End the ECB dictatorship!” shouted Josephine Witt as she leapt onto the podium where Mario Draghi was giving a press conference on April 15, throwing confetti over the European Central Bank (ECB) president. While the lone protester’s “manifesto” was muddle-headed, she highlighted a genuine issue: The ECB is the world’s most extremely independent central bank and it abuses its vast, unaccountable power by acting in a brazenly political way on issues well outside its monetary-policy remit. It needs to be put in its place.
The ECB’s power is exceptional. Other operationally independent central banks are ultimately subservient to elected governments: While Treasury Department officials do not meddle in the day-to-day conduct of monetary policy, it is inconceivable that the U.S. Federal Reserve would refuse to buy Treasury bonds in a crisis if the federal government demanded it do so. But the unelected ECB does not have a political master. There is no eurozone government. The central bank floats above the 19 national ones, paying some heed to Berlin, but refusing to cooperate with the Eurogroup, the meeting of eurozone finance ministers. As panic ripped through the eurozone from 2010 on, Frankfurt (where the bank is based) ignored pleas for it to do “whatever it takes” to quell the run on many countries’ sovereign bonds — until finally, in July 2012, Draghi uttered that magic phrase and investors took him at his word.
The ECB’s inordinate independence is entrenched in the EU treaty, which can only be amended if all 28 European Union governments, parliaments, and, in some countries, a popular vote, agree. Like an absolute monarch, it is further insulated by a German-inspired political taboo on questioning its independent actions and powers, as if it were a crime of lèse-majesté. Such immense power in the hands of unelected officials requires proper accountability, yet the ECB deigns only to a dialogue with members of the European Parliament, to whom it provides insufficient information to thoroughly scrutinize its activities. Nor can the parliament sanction ECB officials for failing to perform their duties or abusing their power.
At the very least, independent, unaccountable central bankers ought to “stick to their knitting,” as Willem Buiter, the chief economist of Citigroup, has argued. Yet the ECB lectures, bullies, and even dictates to governments on issues outside its remit, notably opposing debt restructuring and demanding fiscal consolidation and structural reforms. To get its way, it has even, in effect, threatened to illegally deprive the Greeks and the Irish — and by extension, others, too — of the right to use their own currency, the euro, as legal tender.
The rot began under Draghi’s predecessor, Jean-Claude Trichet. The former governor of the Banque de France fought tooth and nail to prevent a restructuring of an insolvent Greece’s debt in 2010, which would have imposed hefty losses on French banks. To give credence to the spurious claim that Greece was merely going through temporary funding difficulties, the ECB then started buying Greek government bonds. That gave Frankfurt a further reason to oppose the subsequent restructuring of Greece’s market-issued debt in 2012 — and the ECB’s threat to inflict chaos on the eurozone if it was disobeyed greatly limited the debt relief that Athens obtained, as I explain at length in my book European Spring. Both Trichet and Draghi have threatened, in effect, to force Greece out of the euro if it defaulted. Now, the ECB’s ownership of Greek bonds is a further obstacle to the debt relief that Greece needs. Frankfurt is also squeezing Greek banks to pressure the government to comply with its eurozone creditors’ demands in a nakedly political manner.
Trichet’s treatment of another crisis victim, Ireland, was equally outrageous. In November 2010, he threatened to cut off Irish banks’ access to ECB funding — which would have forced Ireland out of the euro — unless the government applied for an EU-IMF loan, bailed out the banks’ (often German) creditors, and implemented austerity and structural reforms. That abuse of power lumbered Irish taxpayers with some 64 billion euros ($68.4 billion) in bank debt — 14,000 euros for every person in Ireland.
Irrespective of the merits of fiscal consolidation and structural reforms, it is not the role of unelected central bankers to demand them — let alone dictate them. Yet ECB officials routinely do. Trichet repeatedly espoused austerity, claiming (falsely) that it would be expansionary. Until he changed his tune in Jackson Hole last August, Draghi, too, demanded that eurozone governments tighten their belts. The president of Germany’s Bundesbank, Jens Weidmann, regularly lectures foreign governments, notably France’s, on what they ought to do. Yet were French officials to give the Bundesbank advice, Weidmann would scream bloody murder.
It’s not just inappropriate jawboning. In the summer of 2011, Trichet and Draghi wrote to Italy’s then-prime minister, Silvio Berlusconi, demanding that he embark on austerity and reforms as a condition for the ECB buying Italian government bonds to limit the panic that threatened to force it to default. When Berlusconi failed to comply, the ECB, in effect, forced the elected prime minister out of office, by letting it be known that it would only buy Italian bonds if he was replaced with a more pliable technocrat.
In December 2011, when it seemed as if panic could cause the euro to collapse within weeks, Draghi demanded that eurozone governments agree to a “fiscal compact” that would entrench much tighter discipline, hinting that this might prompt the ECB to step in to quell the panic. Eurozone governments duly complied and are now locked into this new fiscal straitjacket through treaty obligations transposed into national constitutions.
The ECB has also had a direct hand in setting fiscal policy and economy-wide reforms as part of the Troika (which also includes the IMF and the European Commission), which has run countries that have received EU-IMF loans — Greece, Ireland, Portugal, and Cyprus — as quasi-colonies.
Power corrupts. And unaccountable power corrupts absolutely. The ECB ought to stop meddling in political issues that are outside its remit for monetary policy and financial stability. It ought to relinquish its newly acquired powers to supervise and resolve eurozone banks to a separate agency that is independent of the banks and properly accountable to elected parliamentarians. It ought to be much more open and transparent about its activities, not least whom it conducts financial transactions with, and on what terms. Its officials ought to be sanctioned — and if necessary dismissed — by the European Parliament if they fail in their duties, or abuse their powers.
If the ECB were wise, it would volunteer to do all this — or even call for such changes to be implemented in legislation. Since there is no sign of that happening, it will eventually face a much bigger democratic backlash than a lone protester throwing confetti.
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