If you ask Mario Draghi if he is the saviour of the Euro, he would surely say no. His contribution, he would say, has been to buy time for the politicians to save the Euro, and he has accomplished this by removing the tail-risk of EMU disintegration.
Draghi is now making the rounds to convince politicians and business leaders of the wisdom of his actions. Naturally, his toughest audience is in Germany, where his chosen course has been criticized by the Bundesbank, and may possibly even be legally challenged. On Tuesday, Draghi was in Berlin to speak to members of a German industy group (BDI). What he said there is quite revealing of his philosophy regarding the crisis.
You should read his speech, in which he uses the phrase "price stability" thirteen times to justify the actions of the ECB and tell the Germans just how wonderful the Euro has been for them. The gist of his message was that the ECB really had no choice but to act to remove tail-risk and repair the transmission mechanism of interest rate setting. In doing so, the ECB has "build[t] a bridge to the future. The project must be completed through decisive actions by governments..." He then goes on to reiterate his four point plan for the future of the Eurozone, which I covered in a previous post. Overall, the speech is much more what one would expect from a politician/salesman than from an "independent" central banker.
Why did the ECB have to build this "bridge to the future?" Here is an excerpt from an article in Die Welt.
"Er habe großen Respekt vor der Bundesbank, und er teile viele ihrer Sorgen. Doch in einem Punkt widerspricht er seinem Kritiker Weidmann vehement: Draghi glaubt nicht, dass man einfach abwarten kann, bis die Reformen in den Krisenstaaten greifen. Weil diese sonst gar nicht so lange durchhalten."
Roughly translated, Draghi has great respect for the Bundesbank, but disagrees vehemently with his critic Weidmann on one point: Draghi does not believe that one can simply wait for reforms in the crisis countries to take hold. The EMU would not survive for that long.
Is Draghi justified in taking it upon himself to "save" a currency union that shows no real, lasting commitment to being saved? After all, the very debt mutualization that OMT stands for has been turned down several times already, be it in the rejection of Eurobonds, the failure to agree on an EMU-wide depository insurance mechanism, or all the wrangling that protected public sector holdings during the first Greek restructuring (there will be more). Is it up to the ECB to override the reluctance of elected governments on behalf of some greater good?
Jens Weidman, the head of the Bundesbank, certainly does not think so. In an interview with Neue Zürcher Zeitung, Wiedmann reiterates his belief that decisions regarding the ultimate survival of the EMU and the Euro are purely the remit of governments with democratic legitimacy. (The italicized translations are my own.)
Haben Sie das Staatsanleihenprogramm aus Prinzip abgelehnt oder weil Sie glauben, dass es schlicht nicht funktioniert?
Did you object to the OMT on principle or because you thought it would simply not work?
Es gibt aus meiner Sicht einige Gründe, die gegen das Programm sprechen. Dazu zählen einerseits sicher stabilitätspolitische Prinzipien und die Frage, ob die Notenbank hierzu demokratisch legitimiert ist. Das Programm verteilt Haftungsrisiken zwischen den Steuerzahlern der Euro-Zone um. Das dürfen nur die Parlamente, und diese haben mit den Rettungsschirmen ja auch die passenden Instrumente zur Hand. Die Notenbankfinanzierung darf nicht als umfassender Problemlöser etabliert werden. Andererseits geht es aber auch ganz einfach um die Frage, ob das Programm letztlich mehr hilft oder mehr schadet. Wenn die Hilfe der Notenbank den Druck von der Politik nimmt, den Reformprozess voranzutreiben, könnte die Überwindung der Krise eher erschwert und verzögert werden.
There are, from my point of view, several reasons that argue against the program. These include surely, on one hand and stability principles the question, whether the central bank to do this is democratically legitimized. The program distributes liability risks amongst the taxpayers of the euro zone. Only the parliaments are permitted to do this, and they have the appropriate instrument on hand with the ESM. The Central Bank must not be established as the ultimate problem-solver. Then again, it is also goes to the very simple question of whether the program ultimately helps or harms more. If the help of the central bank removes the pressure to carry forward the reform process, overcoming the crisis could be rather difficult and prolonged.
Draghi hat erklärt, der Euro sei irreversibel, es werde in Europa nie mehr Drachmen und Lire geben. Ist es die Aufgabe der EZB, die Euro-Zone und den Euro in ihren jetzigen Formen zu erhalten?
Draghi has declared that the Euro is irreversible, that there will be no more Drachma and Lira in Europe. Is it the function of the ECB to preserve the Eurozone and the Euro in its present form?
Unsere Aufgabe ist es, den Euro im Rahmen unseres Mandats als stabile Währung zu erhalten. Gegen politische Entscheide über die Zusammensetzung der Währungsunion können und dürfen wir uns nicht stemmen. Die Notenbanken haben ja auch nicht darüber entschieden, aus welchen Ländern die Währungsunion zusammengesetzt wurde. Solche Entscheide können nur demokratisch legitimierte Gremien fällen.
Our function is to preserve a stable currency within the scope of our mandate. Political decisions regarding what the composition of the currency union can and should be are not for us to grapple with. The central banks have not made the decisions concerning which countries would be part of the currency union. Such decisions can only fall to legitimately democratic bodies.
Dann ist das Finanzstabilitätsmandat der EZB also kein Grund, alles zu tun, um den Euro zu retten?
Then does the financial stability mandate of the ECB also provide no grounds to salvage the Euro?
Natürlich sind Geldwert- und Finanzstabilität miteinander verwoben. Für uns gibt es allerdings eine ganz klare Hierarchie, unser oberstes Ziel ist die Preisstabilität. Das Finanzstabilitätsmandat ist dem unterstellt und ist kein Blankocheck. Es gibt Voraussetzungen für die Erfüllung von Aufgaben, welche Notenbanken nicht aus sich heraus gewährleisten können, sondern bei denen die Mitgliedstaaten gefragt sind. Hier findet auch das Mandat der Notenbanken seine Grenzen.
Naturally, price stability and financial stability mandates are interwoven. For us, however, there is a totally clear hierarchy - our foremost objective is price stability. The financial stability mandate is subordinate and is no blank check. There are conditions for the fulfillment of tasks that no central bank can guarantee (will be fulfilled), but that are affairs for the Member States. Here, the mandate of central banks finds its limits.
Obviously, the views of these two men are diametrically opposed regarding the role of the ECB in the current crisis, specifically with regards to OMT. Right now, Draghi has the wind behind his back. He has bet that this "expanded" role for the ECB could never be subject to any meaningful legal scrutiny. It is now up to Mr. Weidmann to demonstrate why he has retained his post at the Bundesbank despite this unacceptable development. Will Weidmann allow the genie out of the bottle and hope to manage it, or will he insist that the cork remain in place?
