Has the European Central Bank gone feral? If it has this is an appalling vista, and with which must be dealt with. But its not clear how.
It’s easy to criticise the European Central bank for its actions, in actions, and general antics during the European debt crisis. It’s also perhaps a little unfair, as at least they have tried to do something, if usually too little and too late. But at least they have tried. But sometimes the wrong thing is the wrong thing and the ECB has been doing the wrong thing. I am aware of the argument that they have done what they have done to force the politicians to act, but that cuts no ice. They are not, or should not be, politicians. They are neither elected nor accountable to citizens and thus should confine themselves to their mandate, of which more anon. Politicians have been doing what they do – the minimum needed at the last possible moment. It is to me now clear however that the European Central bank is no longer a technocratic, but has rather becoming a deeply politicised if not ideological institution. Central bankers are amongst the most powerful people in the world, and when they go rogue they threaten everyone.
Let’s look at what the ECB is supposed to do. It’s overriding mandate, as laid down in article 127 of the treaty establishing, is to maintain price stability. Price stability here has been defined by as inflation being at or around 2%. It is important to note that the ECB council defines price stability. It is its own master – it could decide price stability is inflation at 4% or 0%. It should be impossible for an organization that chooses its own benchmark to consistently fail to hit same. It has chosen 2% and is nowhere close to that – even choosing its own benchmarks it is failing to do its job. However, while that is what we always think of the ECB as being, a beefed up version of the Bundesbank designed to fight inflation at a European level, it does actually have legally binding mandates to allow it to do other things. Article 127 subsection 1 states
“ The primary objective of the European System of Central Banks (hereinafter referred to as ‘the ESCB’) shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. “
Contrary in other words to the oft stated view the ECB has a mandate which is arguably at least as wide as that of the Federal reserve. So long as it does not compromise price stability, it can do most anything and should act to further the aims of the union of which it is a pillar. That it chooses not to operate so means that it is making a deliberate choice. It is choosing to operating in deliberately political and ideological manner. It has aligned itself with one bloc of nations to the detriment of others and is now acting in a manner that makes me wonder if and how it can be made right. Article 3 subsection 1 states that these objectives which are to be pursued shall include such things as balanced economic growth, full employment, social progress, promoting social justice and the rights of children. Every single one of these indicators, across the EU, has reversed in the last half decade under the malign misguided immiserating policies of the ECB. The ECB has failed, comprehensively, in fulfilling its mandate. 23% of the Eurozone an 35% of Greek population are at risk of poverty or social exclusion ; unemployment is at double digit figures across the zone with some population groups experiencing rates of 50% plus; in some groups (parents with at most lower secondary education) upwards of 75% of children are at risk of poverty. We could go on…
In Ireland, then in Cyprus, now most clearly in Greece the ECB has chosen to act not just to not pursue these aims but to act in a manner certain to result in their not being met. They have now acted to cut Greek banks from certain liquidity sources, an act which may have consequences which are while small in absolute terms may be seen as an indication of a Central Bank deeply politicised, disconnected and selfdefeating. Yes, Greece can add liquidity to the system via the ELA mechanism but that also is in the end subject to ECB approval. The ECB has form, with Ireland, of threatening to shut down ELA unless a line is towed in negotiations. Mario seems to be same leopard, slightly different spots, to Jean Claude.
- First how exactly will the cutting off or slowing down of liquidity to Greek banks help anything? It is a naked political play to ratchet up pressure on a sovereign engaged in political dialog towards a political end. These banks were stated, by the ECB itself, to be solvent. Therefore if they were following their own “rules” they should be quite happy to extend liquidity to them. That they are not doing so is because they fear, and it is a reasonable fear, that a disorderly withdrawal of Greece from the various bailout mechanisms will result in Greek government debt being marked down, and therefore the ECB losing money on this liquidity provision. Leaving aside for a moment the fact that potential losses of the magnitude we are talking about here would be entirely immaterial to the ECB, the main way in which these assets would become loss-making would be worthy to become re-denominated in drachmas. Acting to protect themselves from a non-existent loss which would be immaterial in any case they risk precipitating that very loss. Naming calls.
- Secondly, it becomes clear from the above that there is in fact no breakage between the bank-sovereign death loop. Seven years into this crisis and we still have not solved the problem of the bank dragging down the state. If the ECB is concerned with the solvency of Greece it should ensure that rendering illiquid solvent banks is very low on its agenda. Instead it is doing the exact opposite.
- Third, leaving aside the on-going inappropriateness, in terms of timing and magnitude, of the monetary policy response in terms of the overall well-being of the union, the ECB is clearly not acting to its mandate in relation to provision of balanced growth, nor can the threat is now being levelled at Greece in any way square with the mandates for social protection and the rights of children.
- Fourth, the ECB has acted to precipitate or nudge a bank run on a nation. This is the body we are supposed to trust as the regulator of the banks. It is one thing, indeed the right thing, to pop a bubble even if that means local dislocation. It is quite another to push a system on the edge of a cliff ever closer. Although small in magnitude the decision not to provide regular liquidity to soi-disant solvent banks is such a nudge. If the regulator thinks that these solvent banks wont be solvent why would anyone leave money in them? A stress test suggests the banks cannot easily survive a GDP slump (beyond the existing) such as would be caused by a Grexit.
- Finally, the above has resulted in the Bank of Greece being the lender of last resort, much as the Central Bank of Ireland was to Anglo. Again, and in line with the byzantine approach to QE, which leaves (non existent until called into existence by them) the risk with national banks, it shows some erosion in faith in the ability of the system to survive as a system.
Perhaps after all the ECB is composed of General Westmoreland acolytes. He famously stated in the Vietnam war that “in order to save the village it was necessary to destroy it”. Acting to save the euro (seeing it as merely a Neudeutschmark) the ECB runs the risk of destroying it. Either they see a Grexit as an event that will be non-contagious and so are insouciant towards same, or they genuinely do not see that as a possible consequence of their actions Greece may exit. Even if they “win” and force Greece to a renewal of the bailout under “business as usual”, it is a racing certainty that Syriza would fall apart, and the government with it. Where that would end is anyones guess.
This is an extended version of an Irish Examiner Column of Saturday 7 Feb 2015