The ECB is a convenient scapegoat!


What a shocking surprise to hear on the radio an eminent Belgian economist and banker recommend that the ECB instore a differentiated monetary policy within the Eurozone to reflect the diverse economic and budgetary situation of its members!


The parallel with the treatment of the immigration problem is striking: just as reinstating controls at the internal borders of the Schengen area is a prelude to the implosion of the single market and ultimately of the EU, similarly a diversified monetary policy would imply implementing controls over the financial flows within EMU, leading to the same result. This parallelism underlines the extent to which the twin problems of immigration and financial stability are the EU’s top priorities, relegating Brexit to a less urgent status.


For meeting these challenges, it is broadly accepted that the solution will have to be found at EU and EMU level respectively. If the chances of a agreeing on a European solution on immigration remains conceivable though uncertain, (the summit on March 7th with Turkey will be crucial), decisive progress on EMU seems even less likely.


Indeed, any progress on EMU integration is – wrongly – subordinated to the outcome of the British referendum which implies either a damaging waste of time in case of “Brexit”, or in the event the UK remains a Member, the likelihood of paralysing blockages generated by the ambiguities of the safeguard clauses enshrined in the agreement. Deepening EMU being an existential question for the EU, the posture of “non-interference” in the British debate pretexting that it is for the British to decide, is - under cover of the “politically correct” – profoundly hypocritical. The agreement specifies that the UK will not oppose further Eurozone integration; however, the EU should inform voters of the future structure of EMU to which the UK will have to adapt, without prolonging deliberately or unduly existing uncertainties.


The controversy surrounding the monetary policy of the ECB is polluting the debate by maintaining confusion concerning the Bank’s role within the international monetary system on the one hand and within the Eurozone on the other. Negative interest rates and quantitative easing policies impact differently various monetary zones; they affect foreign exchange, fixed income and equity markets or the profitability of the banking sector as well as having consequences on the attitudes of savers and consumers and influencing inflation expectations. However among its peers, only the Eurozone is deprived of a series of intervention tools putting it at a structural disadvantage compared with countries which have retained their monetary, economic and political sovereignty under one roof. 


The absence of a “political Authority” within the Eurozone, endowed with unquestioned democratic legitimacy, facing an “independent” ECB, is a significant handicap in fostering solidarity and adapting a shared monetary policy to diverse conditions prevailing in member states. In the United States, the Federal Reserve Bank’s monetary policy is applied uniformly throughout an economic area as diverse as the Eurozone but the budgetary equilibrium imposed of the federated States allows to address diverse local conditions through the intermediation of the federal budget.


In the absence of a comparable mechanism at Eurozone level, it is not surprising that the ECB has been forced – probably against its better judgement – to assume by default a central role in the economic and financial management of the EMU. As a result, its independence has been often contested because of the fallout of its policies in areas that are beyond a literal interpretation of its mandate. Thus it is criticised for the impact of negative interest rates on the profitability of the banking sector and the remuneration needed to reward depositors; in turn this leads to a loss of purchasing power detrimental to economic growth. Simultaneously and contradictorily, economic and political lobbies intensify pressure to increase monetary easing in order to underpin financial markets and avoid significant losses if not a series of bankruptcies. Both the value of private portfolios (including those of insurance companies) and the equilibrium of national budgets have become tributary to the continuation of rock bottom interest rates. Further criticisms concern the mechanism of quantitative easing accused of circumventing the provisions of the Treaty forbidding the monetisation of public debt; these operations provide banks with handsome intermediation profits – as long as the music doesn’t stop – far less risky than lending to the real economy that the policy is supposed to encourage! Thus, an infernal circle, difficult to break and to which the system seems addicted, has been initiated.


Despite the unquestioned progress made in Eurozone governance since the crisis, the political authorities of Member States have failed to take advantage of the additional time afforded them by the “creative” policies of the ECB, to design and implement the tools needed to confront a future crisis. Such a crisis could be caused by the weakness of the world economy, by the volatility of financial or commodity markets, by excessive levels of indebtedness, by geopolitical developments in the Middle East, Ukraine or elsewhere, or even by social unrest evidenced by the growing successes of populist parties which are sustained by ever increasing inequalities. While the EU would be exposed as well as the rest of the planet to the consequences of a world crisis, members of the Eurozone would be all the more vulnerable that they would be compelled to manage simultaneously the dismemberment of EMU.


In conclusion, while continuing to play an active part in world governance at the UN, Financial Institutions (IMF, Basel,..), etc., Europe should not let this duty interfere with its absolute priority to complete EMU integration. Citizens expect that the same political will needed to manage successfully the immigration problem will be committed to the governance of the EMU. Just like the most beautiful girl in the world, the ECB can only contribute what it has; it is now high time that politicians stop blaming it for their own shortcomings.



Brussels, 6th March 2016


Paul N. Goldschmidt

Director, European Commission (ret.); Member of the Steering Committee of the Thomas More Institute.




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