On the eve of the recent meeting of EU leaders on how to make the European economy more innovative, more competitive, and less dependent on foreign countries, participants were sent a note from the European Central Bank (ECB). In it, the bank outlined what it considers desirable policy to achieve those goals.
One of the measures the bank mentions is the desirability of eurobonds, joint borrowing by EU member states. In this way, the EU would have to integrate more rapidly.
Many welcome that idea because they see the introduction of eurobonds as something that would make the euro more important on the global stage and attract foreign capital to the eurozone. However, the ECB’s action is in fact a serious danger to the currency and thus to the eurozone economy. The reason: the bank is venturing far beyond its mandate. And that can have enormous consequences, even for the long-term survival of the euro.
The ECB’s statutes grant the bank the right to “submit opinions to the appropriate institutions or bodies of the Community or to national authorities on matters within its field of competence.” It is highly questionable, however, whether this advice falls within its field of competence.
By advocating the issuance of joint debt, and thus faster integration of EU member states, the ECB is promoting something that strikes at the heart of member states’ sovereignty and is therefore a political matter. It concerns an aspect of the institutional design of the union, something that nowhere in the world falls within the remit of a central bank. In doing so, the ECB is moving far beyond its mandate. It is as if the president of De Nederlandsche Bank were to advise that the Netherlands should become a republic. Everyone would wonder what DNB thinks it is doing.
What the ECB recently did is a serious matter for several reasons.
First, if the ECB wants politicians to respect the bank’s independence in the future, it should not involve itself in issues that belong to politicians. Instead, it should focus on the very task the Treaty assigned to it: ensuring price stability. Especially since Christine Lagarde became president, the ECB has squandered its independence by engaging in issues such as climate policy. In doing so, it has become a political institution. History teaches us that the price of a non-independent central bank is higher inflation, higher interest rates, and a weak currency.
Second, eurobonds would, for the second time, effectively give eurozone countries a free pass to ignore European fiscal rules. Persistent irresponsible fiscal policy by a country will eventually push up interest rates in that country. With eurobonds, however, that damage would remain limited for the individual country and instead be spread across all other members of the union.
The ECB previously provided such a free pass when Mario Draghi, as ECB president in 2012, promised that the bank would do whatever it takes to save the euro. The capitals of eurozone countries interpreted that as a sign that they did not have to abandon their irresponsible fiscal policies. Reality shows that since 2012 they have indeed paid even less attention to European fiscal rules than before. After all, for them there was no downside: if their irresponsible fiscal policies were to endanger the survival of the currency, the ECB would step in.
Eroding central bank independence and persistent irresponsible fiscal policy in many eurozone countries destabilize the union over time through several interconnected channels: a weaker euro, inflation that is more likely to be high than low, and declining support for the euro in member states. If the euro becomes structurally weaker, that fuels inflation and, through that channel, pushes up interest rates. In turn, that has undesirable consequences for capital inflows into the eurozone (and encourages capital outflows, because the euro may be seen as a future risk), for corporate investment, and for governments’ room to invest in areas such as education and infrastructure.
In short, the economy would weaken rather than strengthen. The fact that countries such as Sweden, Denmark, or Poland have no intention of adopting the euro is telling. If such strong countries had confidence in it, they would want to join.
The ECB is abusing its right to provide advice and to support general economic policy. Therefore, also, or rather especially, supporters of the euro should be deeply concerned about the ECB’s conduct and call the bank to order. The behavior of the guardian of the euro means that, in the long run, it may itself pose the greatest threat to the viability and survival of the currency.
Edin Mujagić is an economist, manager of the Hoofbosch Investment Fund, and author of the book Keerpunt 1971. Every month, he writes an ECB Watch for Investment Officer on the monetary policy of the European Central Bank.