Monday 26 August 2019

ECB needs to take responsibility for mission creep which has consumed it

Draghi's answers to the only grilling the bank is likely to get were inadequate, says Colm McCarthy

MAN ON A MISSION: European Central Bank President Mario Draghi attends a Monetary Dialogue with the European Parliament’s economic and monetary affairs committee in Brussels, Belgium, last Thursday
MAN ON A MISSION: European Central Bank President Mario Draghi attends a Monetary Dialogue with the European Parliament’s economic and monetary affairs committee in Brussels, Belgium, last Thursday
Colm McCarthy

Colm McCarthy

ECB President Mario Draghi made his fourth and final visit for 2015 last Thursday to the European Parliament's economic and monetary committee, the only form of democratic accountability to which the ECB has chosen to submit itself. The ECB has refused to attend at the Oireachtas Banking Inquiry, even though there is nothing in the ECB statute to prevent its officials from making themselves available to national parliamentary bodies.

Draghi is credited with decisive policy initiatives back in 2012, which halted the eurozone sovereign debt crisis and the threat to the survival of the common currency. In consequence, his leadership of the ECB has been contrasted favourably with the performance of his predecessor Jean Claude Trichet, replaced by Draghi in November 2011.

On Thursday, he was quizzed by MEPs, including Irish members Matt Carthy, Marion Harkin and Brian Hayes, about the ECB's dealings with this country.

They had the benefit in framing their questions of three background papers on the role of the ECB in the countries which entered Troika programmes.

The papers focused particularly on Ireland. They were prepared by Daniel Gros, a Brussels-based macroeconomics expert; Karl Whelan of UCD; and AJ Chopra, who led the IMF's team in Ireland. All three papers are critical of the ECB's role in these programmes and specifically in the Irish programme.

Chopra made himself available to the Oireachtas inquiry and his European Parliament paper expands on the views he expressed on that occasion.

It is a comprehensive indictment of the ECB's role in the Irish programme. It has become a familiar mantra for European Commission and ECB officials to cite the current economic recovery in Ireland as evidence that the programme worked and Draghi joined the chorus on Thursday. Chopra's verdict was that whatever the programme achieved, was despite the ECB's contribution. The ECB behaved unsympathetically, exceeded its mandate, imposed unreasonable costs and issued improper threats. He concluded that the ECB, which does not lend money to governments and lent none to Ireland, should no longer play any role in future official lending programmes. Chopra's charge sheet includes the following:

"In a gratuitous November 2010 letter to the Irish Finance Minister, the ECB threatened to cut off liquidity support for Irish banks unless the Government agreed to a financial assistance program with the EU and IMF. The letter also made demands in the areas of fiscal austerity and structural reform that were not only beyond the ECB's remit but were also wrong for Ireland's circumstances.

"The ECB opposed imposing losses on Irish banks' senior bond holders and made it clear that it would not support a programme that included this feature. Even if the ECB believed that spill-over risks dominated at the time, why should Irish taxpayers bear a disproportionate burden to address wider euro area concerns?

"The ECB initially pressed for swift deleveraging of Ireland's banking sector through front-loaded and large-scale asset sales to reduce quickly in its large exposure to Ireland. In doing so, it put protection of its own balance sheet before the cost to the Irish taxpayer.

"Even though ECB liquidity support for the Irish banking system was a critical component of the programme, the ECB was unwilling to make an ex ante commitment on this front. More vocal public support by the ECB from an early stage would have inspired greater confidence and would have likely reduced the required amount of Euro-system funding.

"The ECB threatened to cut off emergency liquidity assistance (ELA) in Ireland and Cyprus, but in Greece it actually did so. The discretion exercised by the ECB in the provision of ELA has made it more of a political actor instead of an independent technocratic institution."

During the questioning by MEPs on Thursday, Draghi defended all of the ECB's actions in Ireland.

He was a member of the ECB's Governing Council (as head of the Italian central bank) from the onset of the crisis until his appointment to the presidency, and therefore shares responsibility for the actions of Trichet's ECB.

He repeated the fairy tale that paying billions to the unsecured and unguaranteed bondholders in zombie banks, against the wishes of the Irish Government and the advice of the IMF, helped the creditworthiness of Ireland.

Mario Draghi is a professional economist, not a career bureaucrat, and cannot plead ignorance in continuing this pretence.

Fine Gael MEP Brian Hayes asked him whether he would write a threatening letter, along the lines of Trichet's ultimatum to Brian Lenihan on November 19, 2010, to another eurozone government in similar circumstances. Draghi omitted to answer the question, and for a good reason.

He had already co-signed, with Trichet, a letter to Italian Prime Minister Silvio Berlusconi on August 5, 2011, while Italian central bank governor. The letter was a graphic example of the mission creep which had overtaken the ECB throughout the crisis.

The threat was to let the run on the Italian bond market continue, without ECB support in the secondary market.

The Trichet/Draghi demands on the Italian government (from its own central bank, the ECB) included actions relating to competition in the services sector, efficiency in the labour market, liberalisation of professional services, privatisations, wage bargaining, unemployment insurance, front-loading of deficit reduction, pension reforms, changes to public finance procedures, introduction of performance indicators, rationalisation of local government and, if needed, constitutional changes.

This list of reforms may well have been advisable and some of them have been pursued by Berlusconi's successors. But they are none of the central bank's business. The principal mandate of the ECB is to pursue monetary policy in a manner designed to attain price stability, defined as an inflation rate of about 2pc.

It is also enjoined, as are all central banks, to furnish liquidity to solvent commercial banks facing depositor runs.

Indeed it was this critical function which led to the emergence of central banks in the first place. The ECB threatened to decline this responsibility in seeking to force the Irish Government into the Troika programme in November 2010, and threatened again (this time under Draghi's leadership) in the case of Cyprus in 2013.

On June 28 this year, the threat was actually implemented in the case of Greece: the ECB capped the availability of liquidity support to Greek banks deemed solvent by its supervisory arm as they faced a depositor run.

They had to close, and the Greek government had to impose exchange controls.

The ECB is deserving of some sympathy. The design flaws in the common currency have combined with dereliction of duty by European politicians to leave the ECB holding the baby.

It can justly claim to have held a poorly-designed system together in difficult circumstances. But the mission creep is its own responsibility.

There is no democratic accountability when the ECB strong-arms governments into policy actions which go well beyond any reasonable interpretation of its mandate. In Ireland's case, Draghi's answers at the European Parliament on Thursday were wholly inadequate.

The process calls into question the efficacy of the only form of democratic accountability the ECB submits to. If the European Union ever gets around to amending the ECB statute, the mission creep needs to be brought under control.

Sunday Independent

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