David Angel, Associate Editor, Michigan Journal of International Law
The European Central Bank’s (ECB) struggle to improve economic performance in the Eurozone demonstrates how divergent interests among European member states can inhibit cooperation and lead to ineffective policy. Post-crisis economic growth in the Eurozone has been sluggish relative to other major developed economies,[i] and many have called on the ECB to employ more aggressive, unorthodox monetary policies in an effort to break out of the slump.[ii] Specifically, many are encouraging the ECB to emulate other advanced economies and engage in large-scale asset purchases from Eurozone banks, in a maneuver typically referred to as “quantitative easing” (QE).[iii] QE is thought to have a number of beneficial impacts, like encouraging banks to make more loans to consumers and businesses with the money they earn from asset sales to the central bank.[iv] The ECB has indicated that it will engage in limited QE, purchasing asset-backed securities (packages of home, commercial, and other loans that are bundled and sold to investors) and as yet undefined bonds from Eurozone banks.[v] However some observers argue that confining QE purchases to asset-backed securities will be ineffective, as the ECB will simply not be buying enough assets from banks to encourage them to make more loans.[vi] Advocates of a more aggressive QE are encouraging the ECB to purchase government bonds, something that the Bank has thus far resisted.[vii]
Sovereign-bond purchases would have a hard time making it through the ECB’s governing council, which is composed of six Executive Board members appointed by the European Council,[viii] as well as central bank heads from each of the 18 Eurozone member states.[ix] Some members of the governing council are wary of purchasing Eurozone sovereign bonds, thinking that it comes dangerously close to direct state financing,[x] something that is illegal under European Union law.[xi] The most vocal critic of bond purchases has been Germany, Europe’s strongest economy and most significant player in economic policymaking. Germany has been successful in the past in imposing its policy preferences on other Eurozone states, and even when it is unsuccessful it often leaves a significant imprint on the final contours of any major economic initiative.
A good example of this can be seen in the development of Europe’s “banking union”. The banking union, created in response to Europe’s sovereign debt crisis, is an attempt by European policymakers to centralize regulatory power over the financial system in the EU government.[xii] So far two “pillars” of this system have been set up. The first is the Single Supervisory Mechanism (SSM), which invests the European Central Bank with authority to supervise the day-to-day operations of the largest banks both within the Eurozone and within non-Eurozone EU member states that volunteer to join the supervisory regime.[xiii] While no non-Eurozone states have volunteered, the ECB is still set to supervise 120 institutions holding 85% of total banking assets in the Eurozone.[xiv] This scope of supervision is much larger than Germany had initially desired, but much smaller than what the EU originally wanted.[xv] The second pillar is the Single Resolution Mechanism (SRM), a centralized EU system for saving troubled financial institutions or, in the alternative, guiding their orderly dissolution.[xvi] The SRM will draw the funds that it needs to carry out its responsibilities from a common pool of funds created from contributions from banks supervised under the SSM.[xvii] During negotiations regarding the creation of the SRM, Germany initially insisted that the SRM take the form of a network of national resolution authorities without a common fund before it capitulated.[xviii]
Despite these past compromises, Germany seems to be holding a hard line on purchases of bonds by the ECB, and other efforts by the ECB to boost lending and economic growth have had limited success. One such effort was the first round of what ECB officials call “targeted longer-term refinancing operations”, or TLTRO.[xix] Under TLTRO, the ECB offers loans to European banks at rates as low as 0.15%.[xx] The hope is that banks would jump at the opportunity to borrow money cheaply, making it easier for them to turn around and profitably lend this money to European consumers and businesses. However, European banks only borrowed approximately €82.6 billion, falling far short of the borrowing level that many analysts expected.[xxi] A new round of TLTRO is set to take place in December.[xxii]
Given the ineffectiveness of the bank’s current policies, some observers are calling on Germany to drop its opposition to a QE that includes the purchase of sovereign bonds.[xxiii] But Germany has dug in on its positions in the past, pursuing its perceived self-interest even when it arguably comes at the expense of the larger European community.[xxiv] Such is the problem with trying to integrate countries with highly variable interests in to a single political and economic unit. If Germany and its allies in the governing council stick to their position, the ECB will soon exhaust its means for stimulating the Eurozone. At that point European governments will need to direct their efforts elsewhere in order to kick-start the economy, and hope in those efforts that they find common ground that is lacking with respect to the actions of the ECB.
Germany’s position is not unreasonable. In addition to possibly being illegal, sovereign bond purchases could expose the ECB to losses in the event that issuing sovereigns defaulted. In such a scenario, these losses would be borne by European taxpayers. And German policymakers are worried about the rise of new right-wing parties that have gained support campaigning against Germany footing Europe’s bills.[xxv] Yet for better or worse Germany’s fortunes are currently tied to the Euro, and their resistance to aggressive ECB policies is contributing to slow economic recovery for Eurozone countries. Absent some alternative policy proposal, they should drop their resistance and allow a more aggressive QE to go forward.
[i] INT’L MONETARY FUND, WORLD ECONOMIC OUTLOOK 181 (2014).
[ii] See Be Bold, Mario, THE ECONOMIST, August 23, 2014, available at http://www.economist.com/news/leaders/21613259-european-central-bank-should-learn-success-unconventional-policies-america-and.
[iii] See e.g., supra note 2.
[iv] What Is Quantitative Easing?, THE ECONOMIST (Jan. 14, 2014, 11:50 PM), http://www.economist.com/blogs/economist-explains/2014/01/economist-explains-7.
[v] Jack Ewing, Europe’s Bank Takes Aggressive Steps, N.Y. TIMES, Sept. 4, 2014, available at http://www.nytimes.com/2014/09/05/business/international/ecb-cuts-interest-rate-further-paving-way-for-more-drastic-measures.html?_r=1.
[vi] See id.
[vii] Richard Barley, ECB Balks at Sovereign-Bond Purchases, WALL ST. J., Sept. 4, 2014, available at http://online.wsj.com/articles/ecb-balks-at-sovereign-bond-purchases-heard-on-the-street-1409849898.
[viii] European Central Bank, The Executive Board, https://www.ecb.europa.eu/ecb/orga/decisions/eb/html/index.en.html (last visited Sept. 28, 2014).
[ix] European Central Bank, The Governing Council, https://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html (last visited Sept. 28, 2014).
[x] Brian Blackstone, Weidmann Warns Against Central Bank Purchases of Government Bonds, WALL ST. J., June 12, 2014, available at http://online.wsj.com/articles/ecbs-weidmann-warns-against-central-bank-purchases-of-government-bonds-1402597078.
[xi] Treaty on the Functioning of the European Union art. 123, Oct. 26, 2012, available at http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12012E/TXT&from=EN.
[xii] EUROPEAN COMMISSION, BANKING UNION: RESTORING FINANCIAL STABILITY IN THE EUROZONE 1-2 (Apr. 15, 2014), available at http://ec.europa.eu/internal_market/finances/docs/banking-union/banking-union-memo_en.pdf.
[xiii] European Central Bank, Banking Supervision, https://www.ecb.europa.eu/ssm/html/index.en.html (last visited Sept. 29, 2014).
[xiv] European Central Bank, List of Credit Institutions, https://www.ecb.europa.eu/ssm/list/html/index.en.html (last visited Sept. 29, 2014).
[xv] Martin Hesse, Christoph Pauly & Christian Reiermann, A Page for the History Books: Brussels Pushes Forward with EU Banking Union, DER SPEIGEL, Sept. 11, 2012, available at http://www.spiegel.de/international/europe/brussels-pushes-forward-with-eu-banking-union-a-855165.html.
[xvi] Supra note 12 at 2, 6-8.
[xvii] Id. at 9.
[xviii] Jim Brundsen & Rainer Buergin, EU Stumbles Toward Bank Plan Deadline as Germany Resists, BLOOMBERG (Nov. 15, 2013), http://www.bloomberg.com/news/2013-11-14/germany-digs-in-against-risk-sharing-in-eu-bank-failure-debate.html.
[xix] Not Cheap Enough, THE ECONOMIST, Sept. 18, 2014, available at http://www.economist.com/news/business-and-finance/21618976-tltro?zid=295&ah=0bca374e65f2354d553956ea65f756e0.
[xxi] Silvia Merler, Fact: T.L.T.R.O. Is Too Low to Resuscitate Optimism, BRUEGEL (Sept. 19, 2014), http://www.bruegel.org/nc/blog/detail/article/1436-fact-tltro-is-too-low-to-resuscitate-optimism/.
[xxiii] See e.g., Cyrus Sanati, As Europe’s Economy Continues to Sink, It’s Time for Germany to Step aside, FORTUNE (Sept. 5, 2014), http://fortune.com/2014/09/05/europe-mario-draghi-germany/.
[xxiv] See Ambrose Evans-Pritchard, France Rebels against Austerity as Europe’s Recovery Collapses, THE TELEGRAPH (Aug. 14, 2014), available at http://www.telegraph.co.uk/finance/financialcrisis/11035432/France-rebels-against-austerity-as-Europes-recovery-collapses.html.