The European Central Bank has decided not to offer the Greek banking system any more Emergency liquidity assistance (ELA). Given the scale of the capital flight from the Greek banking system such a move has inevitably forced the Greek government to impose capital controls (this prevents money from leaving the country) and the closure of the entire Greek banking system. The decision by the ECB to not extend the ELA by one week until the referendum is held on the 5th of July is clearly a political decision. It has nothing to do with the core function of the ECB, which is to ensure the stability of the eurozone financial system, and has everything to do with applying pressure to the Greek people in order to influence the outcome of the referendum. That the ECB, an institution which is by design free to act without reference to any democratic authority, can choose to openly intervene in a democratic process in a eurozone member state is an astonishing demonstration of how much the democratic fabric of Europe has been eroded by European Monetary Union (EMU).
Since the election of the Syriza government massive quantities of euros have been withdrawn from the Greek banking system in what amounts to a huge bank run and the only thing preventing the Greek banks from running out of cash and thus being forced to close have been the loans of euros from the Bank of Greece (BoG). These loans are technically just short term liquidity assistance secured against collateral held by the Greek banks (such as government bonds) and once the bank run ends, confidence is restored, and the depositors return with their funds, those short term loans could be repaid. Under the legal framework of the ECB the BoG is legally just a wholly owned subsidiary and can only issue euros to Greek banks if the ECB gives it permission to do so. So the ECB has always had the power, which it has now used, to force at very short notice all the banks in Greece to close. It is worth remembering that as a central bank the ECB can create, at will, any quantity of Euros it wants and that the amount of euros required to ensure continuing liquidity in the Greek banking system is, in the context of the entire eurozone economy, pretty small. So the ECB could have decided to do what every other ‘normal’ central bank does in similar circumstances which is to assist banks suffering short term liquidity problems by acting as lender of the last resort. The ECB chose not carry out its function of lender of the last resort to the Greek banks for purely political reasons.
The decision to precipitate the closure of the Greek banks will be presented by the ECB as an unfortunate but necessary decision resulting from the ECBs system of regulations and rules. This is not true. The ECB actually has almost complete discretion over which banks it lends to based on its Risk Control Framework. The bottom line is that the ECB can single out specific institutions and decide to not lend to them for pretty much whatever “risk-related” reason they feel like putting forward, and such decisions are not based on any hard and fast rules. As the ECB is accountable to no one it does not have to explain its decision and no outside body is in a position to challenge the ECB decision or even examine its decisions in any detail.
The ECB: a central bank like no other
The ECB was created as part of the European Monetary Union (EMU). EMU was always a political project, it was designed and intended to be a lever that would force further political union. The creators and designers of EMU understood that its architecture was flawed but believed that those flaws would, eventually, propel the members states into fuller political union. Jean Monnet’s post-war strategy was summarised by Tommaso Padoa-Schioppa, one of the euro’s founding fathers, as a chain reaction “in which each step resolved a pre-existing contradiction and generated a new one that in turn required a further step forward.” The politicians, statesmen and intellectuals who shared this vision of marching towards full union adopted a slow piecemeal approach of persuading national governments to participate in uniting Europe, one step at a time. The aim was to make each step easy and seemingly logical but each step forward also made going back harder and would propel the governments and peoples of Europe into the next step and thus ever forward into deeper union. In this process, of deliberately sustained instability intended to tilt Europe forwards into deeper union, economic integration increasingly became the main lever of integration. Thus the European Exchange Rate Mechanism was born in 1979, with the promise made in 1986 to scale it up to a single market. The Maastricht Treaty was then signed in 1992 (amid monetary turbulence that pushed the U.K. out of the currency agreement). The euro eventually came into being in 1999.
When it came time to design the architecture of EMU, and in particular the design of the new European Central Bank, the paradigm used was based upon Ordoliberal concepts. I have previously explored in some detail what is Ordoliberalism and its role in the European project. The ECB is the pivotal institution of European Monetary Union, and the best exemplar of Ordoliberal principles in the pan-European arena. This is unsurprising because in the Ordoliberal narrative the debasement of the currency is the most damaging thing that can happen to the economy (worse than, say, mass unemployment and impoverishment). Ordoliberalism views democratic governments as being inherently suspect in relation to the management of the rules and regulations governing the operation of a market economy, in particularly Ordoliberals believe that the administration of the currency, and even fiscal policy, should be removed from the hands of politicians who are inherently prone to being pushed by popular pressure into making ‘unsound’ decisions. As a result of its Ordoliberal design motif the ECB is far more independent than the Bundesbank has ever been, it is also much more independent than the US central-bank, the Federal Reserve, whose legal status is far weaker and which is directly accountable to Congress and government. The ECB is the least accountable central-bank amongst of advanced nations and is built around strictly Ordoliberal principles.
Unlike a ‘normal’ central banks such as the Bundesbank, there are virtually no checks and balances on the actions of the ECB. It is therefore practically impossible for anyone, for instance EU governments, parliaments or even the unelected EU commission, to enforce any specific goals for the ECB or for that matter enforce anything at all. Unlike the Bundesbank, the ECB is independent not only from all governments but also from all parliaments (including the European Parliament), democratically elected assemblies, and all other institutions within the EU. The Maastricht Treaty defining the ECB’s status, includes the specific and explicit clause that no democratic institution within the EU is even allowed to attempt to influence the policies of the ECB. This legally defined degree of institutional freedom from democratic oversight is unprecedented among democracies.
In addition the ECB is far less transparent than the Bundesbank was. For instance the deliberations of its decision-making bodies are secret. It is not required to publish detailed information about its transactions (this requirement for transparency was also scrapped for the Bundesbank when the ECB was established). While the ECB has the power to obtain data from any bank or company in the EU, the ECB is not obliged to publicise that data or any specific statistics. ECB staff carry diplomatic passports and hence operate under diplomatic protection. The premises and files of the ECB cannot be searched or inspected by any police force and the ECB is legally immune to any search warrants.
The ECB’s history of political interventions
The Risk Control Framework which the ECB will use as justification for its decision to force the closure of the Greek banks is in reality a tool for the ECB to make political interventions into eurozone member states and has been deployed as part of the ECBs wider post crisis program to ‘shape’ political policy in various eurozone countries, and indeed to alter the make up of specific governments.
Italy: Since the crisis of 2010, the ECB has had a program in which it can buy government bonds to help lower a country’s cost of funding. Its was the massive hikes in the costs of borrowing by indebted eurozone countries after 2010 that threatened to wreck the eurozone and the intervention of the ECB in the bond markets drove interest rates back down and made the debt burden of various countries once again sustainable. Using the lever it gained from its bond buying program the ECB played a key role in the downfall of Italian Prime Minister Silvio Berlusconi who, although he was an unattractive leader to say the least, nevertheless was a democratically elected head of state. When Italy’s bond yields rose to dangerously high levels in August 2011, the ECB intervened to buy Italian bonds but also sent a letter to Berlusconi demanding budget cuts and far-reaching reforms. When Berlusconi failed to act with sufficient haste, the ECB eased off on its bond purchases, yields rose again to dangerously high levels and Berlusconi was forced to quit and he was replaced by the unelected ex-EU Commissioner Mario Monti.
The Risk Control Framework itself was directly used by the ECB to force major changes in government policy in both Ireland and in Spain. Normally, the ECB is willing to provide loans to banks as long as they can pledge assets that are listed on its “eligible collateral list”. However, the risk control framework allows the ECB to deny credit to any bank or reject any assets as collateral should it see fit. Specifically the Risk Control Framework states:
the Eurosystem may suspend or exclude counterparties’ access to monetary policy instruments on the grounds of prudence
and
the Eurosystem may also reject assets, limit the use of assets or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations by specific counterparties.
This means that in practice the ECB, which is independent of control by any democratic body and whose decision making process is secret, is free to more or less make any any decision about what financial support it will or will not give to any financial institution in any member state. The ECB has used the power that the flexibility that the Risk Control Framework grants it to control events and dictate policies to various member states at a number of key junctures in the euro crisis.
Ireland: In late 2010, the Irish banks were under severe stress. With international depositors pulling their money out, the banks became heavily dependent on the ECB for emergency liquidity support. The Irish government itself actually had sufficient cash on hand to finance the country for about nine more months and was not at the time seeking bail out funds from the EU or IMF. The ECB decided that it wanted to reshape the politics of Ireland so the then ECB President Jean-Claude Trichet wrote to to Brian Lenihan, Ireland’s finance minister at the time, to say that the position of the central bank’s governing council was that it was “only if we receive in writing a commitment from the Irish government” to seek international assistance “that we can authorise further provisions of ELA to Irish financial institutions.” He was referring to Emergency Liquidity Assistance. The reason the ECB was insisting on a bail out of the banks via the Irish government, effectively bankrupting the Irish state, was so that the the Irish government would have to submit to a program of supervision and the ECB would gain leverage over the Irish government in order to seek specific changes to the way Ireland was being governed. In the letter, having used the threat of withholding financial support for the Irish banks (and thus effectively threatening to crash the Irish banking system) Trichet, the ECB president, then instructed the Irish government to make a commitment to undertake “decisive actions in the areas of fiscal consolidation, structural reforms and financial sector restructuring” in agreement with international partners. So, after clearing their throats by revising the risk control framework with Ireland in mind, the framework had been deployed with devastating use. Faced with ECB threats to withdraw funding and thus trigger a full-scale banking meltdown, Ireland quickly agreed to enter an EU-IMF supervision program.
Spain: By late May of 2011, it had become clear to all that Spain’s banks needed substantial recapitalisation, starting with Bankia, a recently-created conglomerate of a number of cajas or community based savings banks. The Spanish government decided that its preferred method for recapitalising Bankia was to directly provide it with Spanish government bonds. This approach is perfectly legal and would have been approved by Spain’s banking regulators. However, the ECB didn’t like this approach and effectively vetoed it. What gave it such a power of veto? The risk control framework. The ECB could simply threaten to refuse credit to Bankia thus triggering the type of crisis the recapitalisation plans were attempting to avoid. Since Spain could not raise the sums being deployed by the ECB to shore up the liquidity of Spanish, this decision effectively forced Spain to apply to the EU for aid with recapitalising its banks.
In both the case of Ireland and Spain the ECB action were explicitly intended to force both countries into seeking a bail out program from the EU institutions so that the EU institutions could install long term programs to directly supervise the financial and economic policy of those countries. These are explicitly political actions by the ECB and have nothing to do with its mandate as a central bank. The Maastricht Treaty defined the role of the ECB as having having a primary mandate to maintain stable prices it also said that “where possible without compromising the mandate to maintain price stability” the ECB will also support the “general economic policy of the EU” which includes among other goals “steady noninflationary and environmentally friendly growth” and “a high level of employment”.
Greece: It was the ECB that took the hardest line in the initial negotiations with the Greek government when its debt crisis exploded in 2010. A paper, released by the independent think-tank the Centre for International Governance Innovation (CIGI), has compiled a detailed narrative of events that show that the International Monetary Fund (IMF) had pushed for debt haircuts for private bank sector holders of Greek debt. That would have meant those banks getting less than the amount they expected to be paid back. The idea was to provide an orderly process out of the debt crisis and to put the country onto a sustainable footing to repay its creditors. However, the paper’s authors reveal that the proposal came under fierce opposition from former ECB president Jean-Claude Trichet. At an ECB meeting in the spring of 2010 a member of the central bank’s executive board brought up the prospect of debt relief. Trichet allegedly “blew up,” the paper says: “Trichet said, ‘We are an economic and monetary union, and there must be no debt restructuring!’” this person recalled. “He was shouting.”
The issue the IMF faced was that without a restructuring it was difficult to make the case that Greece’s debt profile was sustainable — that is, that the country could actually pay back the loans. That was a problem as under IMF rules it cannot lend to a country, and certainly cannot provide a loan bigger than any the Fund had given any other country as it proposed for Greece, unless there is a high probability of debt sustainability.
In effect, to sign up to the bailout the IMF had to either take a collision course with European institutions, including Trichet’s ECB, or flout its own rules. This put the IMF Managing Director Dominique Strauss-Kahn in a difficult position as he was intending to stand for President of France and a messy fight with the ECB would have been very damaging to his political ambitions. With the deadline fast approaching for a deal, the IMF controversially chose to flout its own rules rather than take on the ECB much to the chagrin of many within the Fund itself who worried that it risked putting the organisation’s credibility at risk. It was the failure to allow Greece to default in 2010, and instead instituting a program that piled more and more debts on a Greek economy that was rapidly shrinking due to Troika imposed austerity measures, that has impoverished the Greek people and meant that the ‘Greek Crisis’ could never be resolved.
Forcing the Greek banks to close before the referendum is a political act by the ECB
From almost the first moment that Syriza was elected the ECB has been actively attempting to pressure the new government though its power to destabilise the Greek banking system. Clearly in the view of the ECB the Greek people had made the wrong choice and that had to be rectified.
It is essential to remember that the Greek banks are not insolvent but are suffering the same short term liquidity crisis any bank can suffer as a result of a bank run, when lots of panicked depositors all want to withdraw their deposits at the same time. The tried and tested standard way to deal with a banking liquidity problem is to lend the banks affected some money to tide them over until the bank run subsides, the depositor panic ends, and cash flows back into their accounts. If an entire banking system, such as the Greek system, is suffering a liquidity crisis because of depositor panic then it is up to the central bank to do everything it can to reassure depositors, reduce panic and anxiety and supply the necessary funds to ensure that the banks stay liquid and open. In the case of the Greek banking system the relevant liquidity support and reassurance comes from the European Central Bank and its wholly owned subsidiary the Bank of Greece.
Since the election of the Syriza government the ECB has sought to keep the Greek banking system in a permanent state of instability and has adjusted its liquidity support so that it was always positioned to crash the entire Greek banking system at very short notice. The ECB did this in order to intervenee in a political negotiationas between governments and institutions in the eurozone, a political act for which it has absolutely no mandate or authority.
On February 4th, following the early the early meetings between the new Syriza government and the EU institutions in which it became clear that the new government was rejecting the previous agreements, the European Central Bank announced that it would no longer accept Greek government debt as collateral, meaning that one important plank for ensuring that the Greek banking system would not suffer a generalised liquidity crisis had been deliberately removed. The actual decision on the renewal of the ECB’s waiver under which it was prepared to accept Greek sovereign bonds as collateral for liquidity was not due until February 28th and by bringing forward the decision the ECB was clearly trying to send a message, apply pressure and support one side, in a political dispute in the Eurozone. This is an overtly political act by a central bank that seems to have lost sight of what are, and are not, the responsibilities of a central bank. The ECB was acting far beyond its mandate in seeking to influence negotiations between Eurozone member states regarding the terms and conditions under which member states lend to their distressed partners. It has no business interfering in fiscal policy: if the Greek government decides to run 1.5% fiscal surpluses instead of 4.5%, hike minimum wages and create lots of government jobs, it is none of the ECB’s business. It should not use changes in fiscal policy by a democratically-elected sovereign government – even one that has inherited an economy in tatters with a massive debt burden – as justification for limiting liquidity to that country’s banking system.
As the protracted negotiations between Greece and the Troika moved to towards its final crisis stage the ECB, often via its directly controlled subsidiary the Bank of Greece, released a string of dire warnings about impending financial catastrophe if the Syriza government did not fold and accept the Troika program. These warning were issued at a time that a generalised bank run was underway in Greece and could only accelerate that bank run and intensify the liquidity crisis of the Greek banks. This is the exact opposite of what a central bank should do under such circumstances.
On the 17th of June as the the capital flight from the Greek banking system accelerated the Bank of Greece, which is under the direct control of the ECB and run by Yannis Stournaras who was the Greek Minister of Finance from 2012 in a previous pro-austerity government, seemed to be actively inciting the bank run by issuing a report which warned of an “uncontrollable crisis” if there is no creditor deal, followed by soaring inflation, “an exponential rise in unemployment”, and a “collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership”.
In its press release the Bank of Greece claimed that failure to meet creditor demands would “most likely” lead to the country’s ejection from the European Union. Under what remit and with with what authority does the ECB believe it can allow one of its member central banks banks to make such overtly inflammatory and political statements at such a delicate moment? Let us be clear about the meaning of this, it is not just a poorly timed expression of an opinion, it can only be interpreted as threat by the ECB to throw the Greeks out of the EU if they resist.
It is incredible that the ECB allowed one of its constituent national central banks to release an official statement whose inevitable and obvious consequence was to accelerate the financial crisis in an EMU member state, with possible risks of pan-EMU and broader global contagion, and the only reason it would do such a thing is in order to force the government of Greece to fold. The predictable result of the Bank of Greece statement was an acceleration of capital flight from the Greek banking system and the response of the ECB was to increase emergency liquidity to the Greek banks by €1.8bn, which was just enough to last a few days until the next negotiating meeting in Brussels.
It doesn’t have to be like this
The ECB and the EU argue that there is no alternative to the current economic policies of the eurozone,and no alternative strategy for dealing with the Greek banking crisis. This is not true.
As far as the ECB is concerned it is possible to imagine an alternative scenario for how things could have played out over recent months, a scenario which would have prevented a Greek banking crisis and kept the ECB out of politics. To imagine the sorts of things a ‘normal’ central bank might do to stabilise the banking system during a period of intense political and financial uncertainty.
The alternative scenario would go like this:
There are no legal impediments to this scenario. Despite the constant blather from ECB officials about how it is tightly constrained by its own rules, it is well known that the ECB can stretch these rules pretty much as far as it likes. Supporting banks that have been deemed solvent is pretty standard central banking practice. So Draghi’s ECB could have provided full and unequivocal support to the Greek banks if they wished. They just chose not to. Similarly, procedures are in place for the European Stabilisation Mechanism to invest directly in banks so a credible assurance of solvency could have been offered.
Why did this not happen? Politics. European governments did not feel like providing assurances to Greek citizens about their banking system at the same time as their government was openly discussing the possibility of not paying back existing loans from European governments. Indeed, the ability to unleash the bank-driven Grexit mechanism has been the ace in the creditors pack all along.
Faced with massive political opposition in Germany and other Northern European countries to their existing monetary policy programmes, Mario Draghi and the ECB Governing Council have decided it is better for them to play along with the creditor country squeeze on Greece than to stabilise the Greek banking system. Imagine the hue and cry in Germany now if the ECB were refusing to threaten cutting off credit to Greek banks, thus undermining Angela Merkel’s leverage in negotiations.
The European Central Bank is a disgrace to European democracy. As part of a grotesquely ambitious project to force European integration from the top down, and as a result of the hegemonsation of the integration project by Ordoliberal ideology, the entire European integration project has drifted in a dangerously undemocratic, and at times anti-democratic, direction. The creation of an immensely powerful institution like the ECB, outside of democratic control and free to act across Europe reshaping governments and their policies at will, is a serious erosion of the democratic fabric of Europe.
