Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

The ECB’s Troubling Future Policy Conundrum

John Ryan 21st May 2014

John Ryan

John Ryan

In the German Constitutional Court ruling on the Outright Monetary Transactions (OMT) programme by the European Central Bank (ECB), judges said they were “inclined to regard the OMT decision as an Ultra Vires act”, adding that this “creates an obligation of German authorities to refrain from implementing it”.

The court judgment has ruled that the OMT is redesigned and greatly limited in scope. “There are important reasons to assume it exceeds the ECB’s monetary policy mandate and thus infringes the powers of the Member States, and that it violates the prohibition of monetary financing of the budget,” the court said.

The verdict was a blow to the ECB’s president Mario Draghi, who unveiled the OMT in July 2012 with his pledge to do “whatever it takes” to save monetary union which allowed the ECB to buy up unlimited amounts of the sovereign debt of crisis-ridden countries. The German Constitutional Court deliberately fenced in the European Court of Justice (ECJ), constraining its room for manoeuvre by issuing its own prior judgment. Regarding the OMT “there are important reasons to assume that it exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the Member States, and that it violates the prohibition of monetary financing of the budget”.

The decision to hand the case over to the ECJ will also dampen the OMT programme’s effectiveness, because the ECB will not dare to buy government bonds before a ruling is issued. The reason is simple: the OMT scheme has never been triggered; to use it now would deprive the ECJ of the possibility of declining the appeal on the grounds that no action has actually been taken. Two of the most respected institutions in Germany, the Bundesbank and the Constitutional Court, are now on record as registering strong objections to the policies underpinning OMT.

Therefore, it is important to note that the Constitutional Court is not asking the ECJ to decide whether the OMT programme is compatible with EU primary law, but rather to limit OMT in ways that make it compatible with EU treaties. The German court suggests that this would require that “government bonds of selected member states are not purchased up to unlimited amounts,” along with the assurance that the ECB would not run the risk of write-off losses at maturity.

ECB President Mario Draghi (photo: CC European Parliament on Flickr)

ECB President Mario Draghi (photo: CC European Parliament on Flickr)

The latter would imply senior status for the ECB relative to private bondholders, as in the case of the Greek “haircut” imposed on creditors. However, this would overwhelm the OMT programme’s stabilizing effects, which rest on the assumption that the ECB, not private investors, would foot the bill should a country declare bankruptcy. Thus, investors’ initial euphoria over the German court’s decision may prove to be short-lived, giving way to rising interest-rate spreads.

Constitutional Court President Andreas Voßkuhle during oral evidence in June 2013 said, the court is focused on establishing “legal boundaries to the ECB mandate” and seeks to “strengthen the guarantees provided by our constitution.” The justices are likely to forbid instruments such as Quantitative Easing (QE) as well.

It is clear that the ECB will be careful not to duplicate the QE of earlier interventions in purchases of sovereign debt by the Federal Reserve, the Bank of England, and the Bank of Japan, which would require several trillion Euro worth of asset purchases. Such a scope of action will not be contemplated unless there is another crisis.

The Asset Quality Review (AQR), or stress tests, of major banks are to be completed by the end of October 2014, at which time some banks may need to repair their balance sheets. While Draghi has been successful in channeling credit to less than creditworthy European governments and banks, the other big problem of the European monetary system has been left unfixed: bank solvency. The AQR would expose the banks that are severely undercapitalized and trigger a set of decisions which belongs crucially to individual member states within the EU legal framework and which may explain why the AQR’s robustness cannot yet fully be taken for granted. But in any event, it will be significantly more robust than the European stress tests of 2009, 2010, and 2011.

The AQR thus can be expected to force a process of prioritizing according to the serious balance sheet difficulties, recapitalization, and restructuring that has been proved by past experience to be the surest way to resolve a systemic banking crisis. An unsuccessful AQR may compromise any future steps towards banking union, with negative consequences for the future prospects of the ECB, the Eurozone, and the European Union.

Now is the time to consider a more resolute rather than the muddling-through approach that has characterized the Eurozone crisis strategy in the last few years. The Eurozone and the ECB may need to consider sovereign debt restructuring which may be undesirable but unavoidable.

John Ryan

Professor John Ryan is a Fellow at LSE Ideas (International Strategy and Diplomacy). He works as a senior Brexit adviser for private and public sector organisations.

You are here: Home / Economy / The ECB’s Troubling Future Policy Conundrum

Most Popular Posts

Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic
Orbán,Hungary,Russia,Putin,sanctions,European Union,EU,European Parliament,commission,funds,funding Time to confront Europe’s rogue state—HungaryStephen Pogány

Most Recent Posts

reality check,EU foreign policy,Russia Russia’s invasion of Ukraine—a reality check for the EUHeidi Mauer, Richard Whitman and Nicholas Wright
permanent EU investment fund,Recovery and Resilience Facility,public investment,RRF Towards a permanent EU investment fundPhilipp Heimberger and Andreas Lichtenberger
sustainability,SDGs,Finland Embedding sustainability in a government programmeJohanna Juselius
social dialogue,social partners Social dialogue must be at the heart of Europe’s futureClaes-Mikael Ståhl
Jacinda Ardern,women,leadership,New Zealand What it means when Jacinda Ardern calls timePeter Davis

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

The EU recovery strategy: a blueprint for a more Social Europe or a house of cards?

This new ETUI paper explores the European Union recovery strategy, with a focus on its potentially transformative aspects vis-à-vis European integration and its implications for the social dimension of the EU’s socio-economic governance. In particular, it reflects on whether the agreed measures provide sufficient safeguards against the spectre of austerity and whether these constitute steps away from treating social and labour policies as mere ‘variables’ of economic growth.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

The winter issue of the Progressive Post magazine from FEPS is out!

The sequence of recent catastrophes has thrust new words into our vocabulary—'polycrisis', for example, even 'permacrisis'. These challenges have multiple origins, reinforce each other and cannot be tackled individually. But could they also be opportunities for the EU?

This issue offers compelling analyses on the European health union, multilateralism and international co-operation, the state of the union, political alternatives to the narrative imposed by the right and much more!


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube