Sunday 23 October 2016

ECB respects strong team opponents

Marc Coleman believes that the ECB could be misinterpreting its own legal regime in relation to our bank debt

Published 13/04/2014 | 02:30

Sticking up for the European Central Bank is not dissimilar to being a Bayern Munich fan - German teams always have their critics here
Sticking up for the European Central Bank is not dissimilar to being a Bayern Munich fan - German teams always have their critics here

Sticking up for the European Central Bank is a bit like being a Bayern fan. If they win you know you're in for a dig (when Bayern beat Man United on Wednesday I sank my pint and slipped out of the pub).

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On these islands, German teams have their detractors. But as the Government was taking money out of our pockets in taxes over the last seven years, it is worth noticing that the Frankfurt side was – at least for tracker mortgage holders – shovelling it back in. With interest rates nearly zero, the ECB is blamed for "not doing enough". Some commentators see the ECB as the "European Centre for Blame". How convenient for lazy economists and timid politicians to have someone to blame for excessive public spending, taxes that are too high, a welfare system that is a trap rather than a ladder and a cost of doing business that is uncompetitive relative to new trading partners.

This last point is especially important. To survive, Europe must lower its cost base relative to new emerging markets. Here the National Competitiveness Council last week reminded us that our costs must fall. The same applies across most of the EU. A race to the bottom? Not quite. But certainly a race to a place where we have a chance of giving jobs to 26 million people currently out of work.

That Germany and Austria have unemployment of around 6 per cent while countries like Spain, Greece, Italy – where reforms are weak or non-existent – it is in double digits proves that the "blame the ECB" brigade are just plain wrong and populist in the worst sense of that word. For some, the ECB is to blame for bad weather.

And they would like nothing more than to see the ECB flood the economy with cheap money. A little inflation will do no harm, they tell us. Even the IMF talks about the "ogre" of deflation. But as Britain's economic growth is proving, the IMF isn't always right about everything. The eurozone is suffering not from deflation but from "lowflation", ie a needed correction of its average price level. And peripheral economies like Ireland aren't the only places where that correction is needed.

"But the ECB's two per cent inflation target isn't being met!" cry the detractors. First, there is no such thing as an ECB inflation target. The ECB has a reference value for inflation, not a target. Second, if the ECB has already lowered interest rates to zero and inflation is not at two per cent, then clearly there is something more fundamental at work. It isn't the operation of ECB monetary policy which needs to be addressed, but its strategy: in an era of globalised trade and growing competitive pressure it is high time the ECB re-examined the relevance of this reference value.

As for pumping up prices, this will only benefit public sector workers who can negotiate wage increases to compensate. The rest of us will face falling purchasing power and an erosion of our savings.

So the ECB is more right than its detractors. Except in one country, and that is Ireland. Here, it has a case to answer. And you don't have to be Nigel Farage to believe it. Moreover, for some strange reason, despite strident euro-scepticism being alive in well in Britain – which isn't even in the euro and has no issues with bank debt in relation to the ECB – in Ireland, where more case for debate exists, there is little of it.

Now the ECB is perceived to have blocked a debt write-off in 2010 that could have cut the size of promissory note debt in half. It would be fairer to say that here it was more a referee than an opposing team.

Having given depositors and bondholders their guarantee in September 2008, our own government was told by the ECB that if it needed and wanted the ECB to help lend it €85bn in emergency loans (and having ignored ECB advice to cool the economy down three years before, it was hardly the ECB's fault or desire that this money was needed in the first place) then it would need to honour that guarantee. Whether it should have entered into the guarantee in the first place is questionable. That it should have ramped up public spending by 31 per cent in three years was insane. But it did. And having done so it was the

ECB's unpleasant task to take the blame.

Likewise the ECB is now playing by the rules when – having last April approved the plan to pay promissory note bondholder debt by issuing of Government bonds conditional on a later judgment – it expresses "serious concern" about how this is being done. Instead of moving these bonds quickly to market at normal rates the State is, Father Ted-style, allowing them to stay "resting" in the Irish Central Bank's account. There they earn an effective profit, which the ECB sees as "monetary financing". Legally the ECB is correct and is less of a protagonist than an honest referee.

But there is an equally strong case that the ECB is misinterpreting its own legal regime in relation to our bank debt. As Karl Whelan has pointed out, Article 34.2 of its legal statutes enables the ECB Governing Council to indemnify national central banks against "exceptional circumstances". Well if the circumstances of Ireland's bailout weren't "exceptional", I don't know what is.

Like Bayern Munich, the ECB respects strong players on the other team. So far only Luke Ming seems to have raised the issue of our bank debt. But Ming – no disrespect to him – is more Edgar Davids than Arjen Robben. We have good candidates for Europe on May 23. But as Bayern ruthlessly demonstrated against Man United on Wednesday, to win in Europe talented individuals aren't enough. You must field a team.

Marc Coleman presents 'The Marc Coleman Show' each Sunday from 9pm on Newstalk 106-108fm

Sunday Independent

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