A report in a German newspaper today that the European Central Bank (ECB) discussed capital controls for Greece, which was subsequently denied by the ECB, highlights deep tensions within the institution.
These rifts threaten to make the problem for Greek banks all the more severe.
The thing that sets the ECB apart from other central banks is that it has to set policy for 19 countries (and 20 if you count Denmark due to its euro-peg), which means it has to cater to different governments that often have divergent needs and interests. Internal politics within the organisation are magnified because so many countries are involved.
Today’s capital controls leak provides a good example of the inside squabbles. The German newspaper FAZ, in which the leak was reported, is usually a reliable proxy for the mood at the Bundesbank, the German central bank. While source of the leak hasn’t been confirmed, if it did come from the Bundesbank, then it could reveal some worrying fractures within the ECB’s Governing Council. These may be as wide as the political divide between Europe’s largest economy and the new Syriza-led government in Greece.
To start with, the somewhat under-reported headline of the article is “Central bankers lose faith in Greece.” The central claim of the piece is that a number of people in the ECB now believe that Grexit — Greece’s exit from the euro — is now the most likely outcome of the current standoff.
The alleged discussion of currency controls is therefore framed in light of that.
FAZ reports that Greek savers have withdrawn €20 billion from their accounts since December, as uncertainty surrounding a new bailout deal for Greece has made people nervous about the stability of the banking system. The outflows have forced the ECB to increase the limit it imposes (at its discretion) on emergency funding for the banks twice from €60 billion to €65 billion on February 12, and again to €68 billion on Wednesday.
Even the suggestion that Greek depositors could find that limits could suddenly be imposed on how much they can withdraw from their accounts risks increasing the pace of these deposit outflows. The ECB’s swift denial of the discussions should also be seen as an effort to downplay that suggestion — but the damage, as they say, may already have been done.
What it all comes down to is who will be left holding the bill in the case of the current talks between Greece and its eurozone partners failing to reach a mutually acceptable compromise.
In theory, the ECB’s earlier decision to revoke Greek banks’ access to loans in exchange for Greek government debt (or government-guaranteed debt) was designed to push the risk of continued support for them onto the Bank of Greece through its emergency liquidity assistance (ELA). In practice, this was always a bit of a sleight of hand. As Professor Karl Whelan of University College Dublin explains:
So the current situation looked as if it was isolating the risk of a bad outcome within Greece but in reality the liability was shared between all of the countries within the monetary union. Except, as Whelan points out, some of the risk was still being held by depositors with more that €100,000 in their accounts (the amount covered under Europe’s deposit guarantee scheme).
If some members of the ECB were growing nervous that the ELA extensions were effectively financing these people to withdraw their funds and creating a larger liability for the rest of the eurozone, they may have decided to act unilaterally to provoke Greece into instituting capital controls. It seems unlikely to be a coincidence that the “leak” comes a day after the latest €3 billion increase in the limit on Greece’s emergency funding, and that it happens to come from a German newspaper with strong ties to the Bundesbank.
This bodes ill for hopes that the ECB had learned the lessons from the past and, as mentioned above, is hardly likely to have improved the situation on the ground in Greece. Ironically, if anything it is likely to have the opposite effect than the one intended if further deposit flight requires the ECB to raise the limit on emergency funding once again.
Since the onset of the eurozone’s economic crisis the ECB has played a central role, alongside the European Commission and the International Monetary Fund (IMF), in shaping bailout programmes for troubled countries within the monetary union. Through this it has become mired in the region’s increasingly fractious politics, wielding its control of emergency funding for the eurozone’s banks as a tool to ensure compliance with bailout terms in Ireland, Cyprus, and Greece.
It is a position that the institution was never really designed to play and one that threatens to taint it long after the current crisis has abated. Indeed a judgement earlier this year by the European Court of Justice on the possibility of the ECB buying up government debt warned that “the significant role which the ECB plays in financial assistance programmes (design, approval and regular monitoring), its actions might in certain circumstances be perceived as being more than mere “support” for economic policy.”
The lesson that the ECB has to learn is that it cannot continue to play both the roles of ambulance service and police force in the eurozone if it is to maintain its independence. It is Europe’s lender of last resort. It is high time it accepted that responsibility.