As European leaders grant the ECB expansive powers, the Cyprus bailout, the negative sovereign-bank feedback loop and the continued provision of liquidity support underscore reputational risks for the central bank, warns Willem Buiter, Citi's chief economist.
Fears are growing about the ECB's expansive supervisory role over fiscal, monetary and banking affairs in the eurozone as the single-currency bloc's monetary guardian is accused of politicization from the hawks and doves.
Willem Buiter, chief economist at Citi
The troika – the European Commission, the IMF and the European Central Bank (ECB) – managed the bailouts for several countries, including Greece in 2012, after the eurozone sovereign debt crisis, sparking allegations that bailout packages lacked democratic legitimacy. In addition, the Cyprus crisis underscored the structural dependence of the economy on the emergency liquidity assistance facility, which is ultimately signed off by the ECB.
At a committee meeting held at the House of Lords on Tuesday, Willem Buiter, chief economist at Citi, was scathing in his assessment of the hole in the heart of the EU's democratic governance.
“[The ECB and the European Commission] basically consist of unelected technocrats without political legitimacy other than what is bestowed on them under the treaty," he said. "But in reality and in practice, an enormous increase in the power of these institutions without accountability to the electorate ... is very worrying."
Buiter argued that even legally independent bodies such as the ECB can be manipulated. “The argument for independence is not about monetary policy – anyone can do it," he said. "The argument for independence is that it is very easily manipulated in a political manner. It should be substantively accountable.”
However, at the same committee meeting, Holger Schmieding, chief economist at Berenberg Bank, disagreed. “To some extent, independent does mean unaccountable," he said. "But the ECB is in some ways accountable to European Parliament. Their members are appointed in a way which is political. But once appointed, the political masters that appointed them cannot tell them what to do.
“That kind of independence for a limited number of years with a clear mandate has served the world roughly well for central banks."
The troika has long been criticized for the way in which it encouraged tough austerity measures, including harsh income cuts and tax increases, in return for a bailout in Greece last year. Greece is now in its sixth year of recession and the unemployment level is one of the highest in Europe at 27%.
Schmieding, while striking a relatively sanguine tone on the ECB's reputation, conceded that urgent steps were needed to boost fiscal legitimacy in the eurozone, restating that the ECB’s role in a Genuine Economic and Monetary Union should be to point out the shortfall of banks but not to monitor fiscal obedience.
The role of fiscal monitor should be the job of independent counsels and not bodies such as the troika, he argued.
“What I would prefer is to have an independent committee like the Central Bank Council to check whether countries are doing what they have to do and whether they are meeting the requirements of the fiscal rule and whether they are making their fiscal position sustainable for the long term,” said Schmieding.
“What is needed is a much faster resolution of banking problems and this does not have to come in the shape of a banking union. What is more important, however, is to force each country to tackle banking [problems].”
For Buiter, the European Stability Mechanism and outright monetary transactions – in accordance with conditionality – are sufficient for liquidity needs. However, what is lacking is a sovereign resolution facility in the euro area. “We need one [and] should have had one when Greece first knocked on the door,” he said, but did not elaborate further on the proposed structure of such a body.
Banking supervision needs to be supranational to boost transparency and reduce self-interest, even amid Germanic intransigence, Schmieding concluded, adding: “It makes sense to delegate the task of finding out what the shortfalls of banks are to independent organizations that are not national. For finding out the shortfall of banks, the ECB is a good organization."