Cause and Effect in European Politics and Law

The European Central Bank - a Savior of Last Resort

Ralitsa Kovacheva, December 2, 2011

"A credible signal is needed to give ultimate assurance over the short term.

What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.[...]

Other elements might follow, but the sequencing matters [...] Confidence works backwards: if there is an anchor in the long term it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations."

This statement was made by European Central Bank President Mario Draghi before the European Parliament. In only a few sentences he managed to answer all the questions related to ECB's role for solving the crisis. First the rules, then the actions, Draghi`s message was.

Despite this clear statement, MEPs from different groups repeatedly urged the ECB to intervene in resolving the crisis as a lender of last resort. "It is time for the ECB to take on more radical duties", George Sabin Cutas MEP (S&D, Romania) said, and according to his Irish colleague Gay Mitchel (EPP, IE), "natural justice must precede written law". "The ECB is already the lender of last resort and now politicians must legitimise this", Kay Swinburne (ECR, UK) said.

This forced Mr Draghi to give a short and clear answer: the ECB should not be asked to act outside the Treaty. Не had to explain again that first member states should create a fiscal union, within which to formulate new tasks of the ECB. "It would be a mistake to have the ECB to act outside the Treaty, it would undermine the credibility of the ECB, which is now the strongest institution in the euro area."

After the debate MEPs adopted a resolution on the report of Ramon Tremosa i Balcells (ALDE, Spain) on the ECB 2010 report. Because of the lack of a crisis framework in the euro area, the ECB had to take risks outside its mandate, the rapporteur stresses, while commending the ECB's efforts to reduce spreads in vulnerable member states through the purchase of government bonds. It poses a moral hazard of redistribution that "is enhanced if the ECB accepts too often debt emitted by the member states as a guarantee, and even more so if it buys them." In addition, the ECB should be "more open about the quality and quantity of the securities it holds."

As expected, the report supports the need for common EU fiscal governance and proposes "the creation of a European Ministry of Finances and a European Treasury able to emit Eurobonds." The rapporteur recommends the option of "blue-red" bonds, which will provide cheap financing for countries with low levels of debt and very expensive financing for those who break the rules. At the same time, "Eurobonds can give an impulse to the euro as a global reserve currency." The EU also needs a European credit rating agency and a European Monetary Fund, to “ensure that the IMF will not need to be involved in Europe’s future credit policy” and to replace the European Stability Mechanism, which was established outside the Treaty, the report says.

"I am conscious that this proposal can only become a reality after a much-needed reform of the Stability and Growth Pact that allows for a better control of the dysfunctional budgetary policies in the eurozone Member States," Ramon Tremosa i Balcells writes in his explanatory statement. In his speech to lawmakers he stressed that in order to achieve fiscal union "the old nation-states must lose part of its national sovereignty." "The ECB we trust!", MEP concluded, paraphrasing the American motto "In God we trust".