Comment on the dubious dual mandate of the ECB

2022-06-26

Writing on the European Law Blog, Nuno Albuquerque Matos elaborates on the European Central Bank’s June monetary policy decisions. The analysis centres on the predicament the ECB finds itself in as it tries to (i) conform with its mandate of price stability in the face of rising inflation while (ii) maintain its accommodative policy stance which is necessary for the integrity of Europe’s single currency:

In my view, the referred decisions taken by the ECB derive from a sort of shadow mandate underlying its action. Indeed, fearing that the rise of certain Member States’ debt interest rates could inevitably lead to a return to previous national currencies and, potentially, a eurozone break-up, the ECB is informally assuming a dual primary mandate: ensuring price stability and eurozone survival.

Crucially, the described course of action illustrates the paradox of EMU integration in its current form. I am not referring to the well-known division of competence mismatch between the Union and Member States, but to the fact that the legal values enshrined in the Treaties no longer adequately and accurately reflect societal needs. It is by now clearer that, in the current institutional setup, some Member States need the ECB to survive in the monetary union: after the announced policy on June 9th, it took only one day to bring back sovereign debt crisis fears.

I agree with the salient point: without the ECB’s quantitative easing the Eurozone would have collapsed under the weight of its own contradictions and shortcomings. As things currently stand, Member States have conferred control over both macroeconomic policy levers to the supranational level: (i) fiscal policy is formulated within the confines of the European Semester (aka “Economic Governance”) in accordance with strict rules on debts, deficits, and pursuant to the singleness of the Single Market, and (ii) monetary policy is trusted with the ECB. Governments thus lack the means to respond to economic shocks in a manner that is beneficial to their domestic economy (given the heterogeneity of national economies, such shocks are asymmetric).

Put concretely, a country cannot devalue its currency in an attempt to ease its way out of a recession. Similarly, the government cannot boost the competitiveness of local businesses by shielding them from competition as the rules of the single market strictly prohibit as much. All things combined, the rigidity of the European Economic and Monetary Union makes austerity a one-way street: the story of European affairs since ~2010 in a nutshell.

The reason countries like Greece need the ECB’s intervention in the secondary bond markets is because it is impossible to exit a crisis by austerity alone, as it deepens and prolongs the economic downturn. If you cut people’s disposable income amid a recession, the government earns fewer taxes, which does not help with its deficits, the national product shrinks, which increases the debt to GDP ratio, investors see the negative indicators which puts upward pressure on bond yields, thus reinforcing the vicious cycle.

It can be said that foregoing sovereignty over both macroeconomic levers is worth it as European integration provides other benefits. At least such was the thinking when the EMU was originally designed. In the 2000s, these beliefs were plausible because no crisis was in sight. The fair weather construction of the Euro seemed to stand just fine. Though ever since the 2008+ financial calamity, things have taken a dramatic turn for the worse. We are dealing with crisis after crisis. To claim that some vague promise of an integrated Europe will address our woes is more wishful thinking than practical guidance.

Europe is caught in the interregnum between the awkward intergovernmentalism of the Maastricht Treaty (single currency but decentralised governance) and a fully fledged European-level government that is yet to be enacted. The prospect of the latter is not in sight, which implies that the legally and politically questionable policies of the ECB will remain the norm for years to come.

On the legal front, it can be argued that the ECB’s implicit duty to preserve the integrity of the Euro Area springs from the singleness of its mandate for price stability. The precedent of the Outright Monetary Transactions suggests as much. It then remains to be determined whether citizens will be satisfied which such a broadened interpretation of the Treaties. I remain of the view that OMT undermines the European value of democracy, as the ECB—a technocratic body—was offering a quid pro quo to elected governments in exchange for “strict conditionality” which is code language for enhanced austerity under the auspices of another technocratic institution: the European Stability Mechanism.

One must then ask the all-too-important questions about the Economic and Monetary Union: “who governs?” and “where is the locus of power?”. The short version of the answers is that the European level is not democratic. The fact that we are discussing the ECB’s self appointment as protector of the Euro is sign that there is a power vacuum and the concomitant absence of legitimacy/accountability. Whether it is the ECB or the institutions involved in the European Semester, Europe does not have a proper government, a European treasury as a genuine counter-party to the ECB, and all the legal arrangements an order of this sort requires.

As such, and seen from the perspective of citizens in countries that are dependant on the ECB’s whims, the proposition of European integration, manifesting in the current poorly designed architecture, is unappealing (to say the least). The choice is between austerity at home or migration to some other country, such as to Germany. And while the EU makes the movement of people possible, this alone cannot be examined without reference to the wider context: when you have to migrate in order to survive, you are a refugee, legal technicalities notwithstanding. Besides, mass migration does not rectify the errors in the institutional makeup of the Union: it compounds the existing problems by adding the pernicious effects of brain drain on top of them.

Fundamentally, the EU is dealing with an inescapable dilemma. Its response is to dither and let the underlying malignancies fester. There will be a reckoning. Does the EU want to be a union of largely sovereign nation-states? Then it needs to roll back the framework of Economic Governance, abolish the Euro, and the like. Alternatively, does the EU aspire to be a fully fledged federal democracy? Then it needs to complement existing institutions with new ones so that the integrity of the Union becomes a matter of democratic deliberation, not be subject to the kind of bureaucratic calculus that happens behind closed doors. The untenable intermediate state we are in harms peoples but also damages the otherwise laudable ambition of a united Europe.