The ECB May Not Remain the Bedrock of Euro Resilience
Jakob Vestergaard examines the future of the European Central Bank (ECB) and the euro's resilience.
The season for speculation about the future leadership of the ECB has started, as Draghi embarks on the last year of his term. The matter is compelling because the leadership profile of the next president has implications for a number of key issues, including for the extent, pace and sequencing of the widely expected “normalization” of the ECBs monetary policies. But the more fundamental question is whether the ECB will “continue to react pragmatically to systemic threats and contagion, as it has since 2012”, notes Reza Moghadam, or whether it might “revert to a stricter and narrower approach”. The latter option is dangerous, but likely nevertheless.
One of the most striking features of debates over the past year on reforms to bolster the euro has been the absence of an in-depth engagement with the role of the ECB in this. The much-debated proposals of the 7+7 Franco-German economists were silent on the role of the ECB in completing the euro, as pointed out by Jérémie Cohen-Setton and Shahin Vallee. This is unfortunate for the ECBs “responsibilities and operating procedures” cannot meaningfully “stay outside of debates about the future architecture of EMU”, they noted.
The disregard of the role of the ECB in bolstering the euro is particularly disconcerting – indeed almost paradoxical – in light of the current impasse on euro reforms. With little noticeable progress in the euro reform process, the ECB remains very much “the only game in town”, as Reza Moghadam recently stressed. But it would be a mistake to take the ECB to be an unwavering bedrock of the euro. Indeed, the ECB’s narrow price stability mandate, and the concomitant indifference to employment concerns, may gradually undermine public support for its independence, as Moghadam argues. To avoid that, he says, the ECB should adopt a dual, “inflation-employment” mandate along the line of the US Fed.
It is important to stress that beyond the issue of the ECBs narrow mandate, it would be a dire mistake to take the Outright Monetary Transactions (OMT) programme for granted, as a pillar of European central banking that will remain credible and viable in the coming years. Nicolas Verón and others have repeatedly made the case that it was the political commitment to banking union from all member states (in June 2012) that made it possible for Draghi to declare the ECBs preparedness to do “whatever it takes” to save the euro later that summer – and for the ECB to subsequently launch the OMT programme. This reasoning is plausible, but one would then suspect the dynamic to work both ways.
If the political commitment to the banking union withers away – a process that seems already in full motion – and it becomes apparent that the banking union is unlikely to be “completed” in any foreseeable future, what will the reverse repercussions for the ECBs commitment to the OMT be? With faltering commitment to the banking union, should we not expect to see a highly disconcerting erosion of the market confidence in European government bond markets originally instilled by Draghi’s commitment and the OMT?
Such concerns only reinforce Moghadam’s larger point, of course, that a broadening of the ECBs mandate, is essential to the longer-term viability of the ECB and the euro itself. An expanded mandate should add not just employment, but financial stability as a key concern too. It will be much easier – not least politically – for the ECB to tackle market liquidity crises in the future, if it has an explicit financial stability mandate, and henceforth won’t have to resort to various circumscribed motivations for acting as lender of last resort for governments, or be constrained by reluctance and delay resulting from being essentially at cross-purposes with itself.
Unfortunately, there are few signs indicating that the ECB will broaden its mandate any time soon. While the ECB may be formally independent, it will always operate within the subtle boundaries of EU politics, a recognition more than hinted to in Nicolas Véron’s assessment of the conditions of possibility of the ECBs OMT.
Given that Germany and the new Hanseatic league, the Dutch-led alliance of austerity-oriented Northern member states, are increasingly frustrated and concerned by the continued fiscal indiscipline of some member states, a stricter and narrower approach in a post-Draghi ECB is considerably more likely than an expansion of the ECBs mandate. And this (too) is very bad news for the prospects of euro resilience when the next crisis hits.
Dr Jakob Vestergaard is Associate Professor at Roskilde University.
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