The ECB’s press conference Thursday was written off as a snooze by some who felt there was nothing new – and just plain frustrating for others who felt it introduced more new questions than it answered.
There was one exchange in the Q&A that deserves attention, though, because it reveals quite a bit about the thinking of the European leaders who are driving this crisis right now.
The exchange was between CNBC’s veteran ECB watcher, Silvia Wadhwa, and ECB president Mario Draghi.
Wadhwa has been writing about how the notion of conditionality – the requirement that euro area member states must submit to austerity policies designed by supranational agencies before receiving ECB aid – seems to go way outside the mandate of the ECB.
Here is part of her response to the ECB’s historic OMT bond-buying plan revealed in September – which features conditionality as its hallmark – and the apparent contradiction it poses:
It’s really that simple: either bond purchases of euro countries where yields are blowing up in a fashion that threaten the functioning of the markets are within the ECB mandate. Then the ECB should embark upon them whenever it sees fit. Or they are not within the mandate; then it should jolly well stay away from them, because it would be illegal. Period. End of argument.
But to say “we are acting within our mandate”; but we shall only do so, if you (the country in question) deliver on certain political conditions; then — I am sorry — the ECB is taking on a role it was never designed for and that is certainly outside its mandate. The ECB was designed for supporting “the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community” (in as far as it doesn’t infringe upon the primary mandate of safeguarding price stability). Supporting policy, not setting conditions for it or setting an agenda for which economic of financial policies a given country embarks upon.
In other words, the ECB now theoretically wields incredible power over the sovereign states that form the eurozone – especially those who desperately require help – even though it is simply intended as an apparatus of the euro area to provide support for its member states.
Silvia Wadhwa was in the press corps today at the ECB presser, and for the first time since the ECB announced its OMT program, conditionality and all, Wadhwa got to put the criticism to Mario Draghi directly.
Below is the exchange.
Wadhwa asked Draghi:
If the OMT is a purely monetary measure to help repairing dysfunctional fragmented markets, how can you say, how can you set political preconditions to it? Is that not a little bit like my local fire brigade telling me I can only turn on the water “if you show me you’ve got a roof improvement program?”
This actually stirred what developed into an impassioned response from Mario Draghi.
Draghi told Wadhwa that he totally disagreed, but he revealed an important fact:
The second point is really…I think it’s just the other way around. I think I did say something about this last time we had this press conference. We started thinking – when the OMT was designed, we had the perception and the evidence that there were tail risks in the area; namely, that there was a bad equilibrium for certain countries in certain markets.
It means that expectations were self-feeding and would create, in the end, disruptive scenarios.
So, that’s the case for the policymaker – which in this case is the ECB – to step in with the program.
But, at the same time, we shouldn’t forget how these countries got into a bad equilibrium to begin with. Namely, bad policies – or in some cases, no policies at all for a long period of time, while the rest of the world was changing, completely.
So, the first conclusion was that any monetary policy would have no effect if the other policies wouldn’t change. That’s why conditionality is so important.
It’s actually – as I said at the beginning – what makes the monetary policy effective, and it’s what protects the independence of the ECB.
So, it’s not really – I wouldn’t, buy the example, the example you made, I think it’s, it’s really an integral part of this. The second quest–well, this was the second question, really. Thank you.
The ECB’s independence is thus preserved. The sovereignty of euro area member states is not.
In other words, Draghi basically acknowledged the concern Wadhwa raised about political leverage by saying that it was justified in pursuit of the repair of monetary policy. And the monetary transmission mechanism is, of course, an ongoing concern.
The upshot is that it should be perfectly clear now that if the ECB’s intent is to repair the mechanism, it is more than willing to discard notions of popular sovereignty to do it.
So, it may be reasonable to expect the ECB to wield more of its influence in Europe going forward as democracy becomes increasingly subverted by supranational policies and negotiations.