To say that the Euro is facing existential threats is no exaggeration. The European single currency was hailed until not too long ago as an aspiring global reserve currency, second only to the US Dollar. But the Eurozone’s handling of the Greek debt crisis is putting the Euro’s future in question. The potential for Greece to leave or be expelled from the Eurozone is all too real. And if Greece goes, who is to say that Ireland, Portugal and perhaps even Spain or Italy could follow?
The Euro, although ‘a currency without a state’, is backed by significant political and even state-like commitments. That the Euro must be saved at all costs is an imperative suggested not only by ECB president Mario Draghi, the technocrat, but German chancellor Angela Merkel, the statesman. Political elites, particularly in Germany, have staked their legacy on its success.
But there is a growing mismatch between the monetary and fiscal sides of the Eurozone governance system and this has led to a number of problems. The main problem is that, while we may not find it easy to live with the ECB, we cannot live without it. Yet, when we look at the Greek bailout programmes, it is easy to conclude that they have failed. The Troika has imposed austerity, which has led to a severe contraction of output and highly adverse welfare effects. This was intended, in a way, to punish Greece for its profligacy rather than serve as a way out of the crisis.
The ECB is far more independent than the Federal Reserve, whose legal status is far weaker and which is directly accountable to Congress and the government. The ECB was supposed to be like the German central bank, the Bundesbank. It has, however, failed to emulate the distinctive attributes that made the Bundesbank successful, such as accountability and interdependence with other democratic institutions. The Maastricht Treaty, which defines the role of the ECB, says that the ECB has a primary mandate to maintain stable prices. It also says that, ‘where it is possible without compromising the mandate to maintain price stability’, the ECB will also support the ‘general economic policy of the EU’, which includes, among others, ‘steady, non-inflationary and environmentally friendly growth’ and ‘a high level of employment’. However, the emphasis is explicitly on price stability. The ECB can justly claim to have held together a poorly designed system in difficult circumstances. But the mission creep is its own responsibility.
The ECB, in fact, is the least accountable central bank among advanced nations. There is no democratic accountability when the ECB strong-arms governments into policy actions that go well beyond any reasonable interpretation of its mandate. Not only is the ECB shielded from politicians, ECB statutes have also placed it beyond the reach of democratic rules on bad behaviour. The ultimate control politicians have over a central bank is the power to change its statutes and the power to appoint governors. For example, in the case of Germany, a simple majority in the Bundestag can change Bundesbank law. This procedure is absent in the Eurozone. The statutes of the ECB can only be changed by revising the Maastricht Treaty, which requires unanimity of all member states. The ECB today argues that the only institution that has the right to limit its power is the European Court of Justice, which has an activist Europhile interpretation of European treaties. The crisis has given the ECB governing council such an increased power that no national government or national institution can match it.
The project of European integration was not designed democratically, or at least not in the way democracy is traditionally conceived in terms of placing ultimate law-making authority in the hands of the people or their elected representatives. It is not even meant to be democratically responsive in the way that term is usually understood. Any democratic deficit that the EU suffers seems to many observers a deliberately constructed one. So how could we control the ECB in the future? It needs to be placed under a stricter and more direct supervision by democratically elected politicians. One of the institutions the president of the ECB puts himself in front of, the European Parliament, does not inspire anyone to believe that the ECB is being held accountable. This very independence means that democratic governments now have no way to keep the ECB accountable if it starts to violate its mandate.
With almost prophetic insight German economist and former president of the Bundesbank Karl Otto Pöhl wrote in 1988: “In a monetary union with irreversibly fixed exchange rates the weak would become ever weaker and the strong ever stronger. We would thus experience great tensions in the real economy of Europe … In order to create a European currency, the governments and parliaments of Europe would have to be prepared to transfer sovereign rights to a supranational institution.”
The change in its mission introduced by Outright Monetary Transactions and expanding its quantitative easing programme to include corporate securities has profound political consequences. The ECB has become more powerful than the Fed, but with even less democratic oversight. In the early stages of the crisis, the ECB exercised its influence through secret letters to troubled member states such as Ireland and Italy, laying down conditions and implicitly threatening to withdraw support if they were not met. Now, the bank exercises its power directly and in public.