27th July 2012
With this in mind there seems to be plenty of scope for ambiguity over the latest statement from Mario Draghi, the president of the European Central Bank (ECB):
"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."
According to the Treaty of the European Union the primary role of the ECB is to "maintain price stability" and to "support the general economic policies in the Union" insofar as it does not impact the former objective. In relation to the current sovereign debt crisis in southern Europe, however, the following passage is more pertinent:
"Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States…in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments."
Any policy that involved the direct purchase of the government debt of eurozone states by the ECB would be a breach of the mandate. In other words, quantitative easing (QE) is out.
This helps explain why the Long Term Refinancing Operations (LTRO) had to use the banking system as a conduit to funnel money into struggling member states. It also provides clues as to why the policy failed to reassure bond markets – the LTRO money was required to meet current refinancing needs rather than unlimited liquidity supplied by QE, which stands as a guarantee against future uncertainty.
It was, however, playing rather fast and loose with the ECB's mandate. Unlike Jean-Claude Trichet, Draghi's predecessor, who famously said that the ECB had not even discussed direct purchases of government debt the incumbent has proven more creative in his approach to monetary policy.
If Ewald Nowotny, the governor of Austria's central bank and ECB Council member, is to be believed then we may soon see the biggest sleight of hand yet. Earlier this week he told Bloomberg that he could see arguments in favour of granting the European Stability Mechanism, the region's bailout fund, a banking license. In doing so the fund could circumvent the central bank's mandate to channel ECB funds into struggling states in a de facto QE programme.
The question is whether the use of such a flagrant work-around effectively renders the bank's mandate irrelevant. Given the sensitivities surrounding the federalisation of Europe and the collectivisation of debt obligations, these methods might look to some as a way to avoid democratic obstacles to policy initiatives.
Few in Brussels will complain if Draghi succeeds in bringing down debt yields in peripheral Europe. After the dust has settled, however, citizens of member states may find that they have sleepwalked into a federal Europe without ever having been consulted.
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