Is the ECB enforcing the will of the big Eurozone member states on the small? Can the euro area live with that?

The interview of Benoît Cœuré, Member of the Executive Board of the European Central Bank (pictured here), was
conducted by Marie Charrel of ‘Le Monde’ newspaper and was published on 27 July 2015. (ECB Audiovisual Services, 27 July 2015).

Reviewing the political or economic events in retrospect always gives the observer a privileged position. This is the point where Benoît Cœuré – a Member of the Executive Board of the European Central Bank – found himself at an interview last Monday. At some point he was asked if the ECB had suffocated Greece’s commercial banks in order to convince the country to ‘surrender’. After reciting the usual narrative that the ECB had increased the liquidity to the Greek banks from €40 billion to €130bn during the last few months he said, “That people are turning to the central bank on issues that demand a political rather than technical response reveals a serious weakness in the institutional functioning of the euro area. This weakness fuels excessive expectations concerning the ECB”.

In this way Cœuré opened two doors wide. The one led him to make a deeply political observation. He questioned the foundations of the Economic and Monetary Union by saying that “The decision-making mechanism at the heart of the monetary union does not work well. It is based on an intergovernmental principle that is no longer appropriate”. He didn’t restrict himself though to that. He went on by making political proposals about how the Eurozone should function from now.

Molesting Greece

The second door that the executive director of ECB opened leads directly to a well founded guesstimate about how the Greek Prime Minister was convinced to utterly discard his personal and his left-wing SYRIZA party beliefs. To be reminded that ten days ago Alexis Tsipras made a full 180 degrees u-turn and asked his Eurozone colleagues for a third bail-out, which carries severe terms and conditions leading the country to even deeper austerity and pains.

In reality Tsipras has let down an entire nation. On top of that he is now fighting to control SYRIZA. A large part of the party’s deputies and central committee members have repudiated his choice to impose on the country a new austerity program in return of more loans, to repay the confirmed as unsustainable Greek sovereign debt and recapitalize the always shaking banking system. Many distinguished economists have concluded that this new bail-out program is untenable.

How did this happen?

Understandably Cœuré couldn’t reveal the entire process that led Tsipras to totallyabandon his promises to the people and finally ask for a painful and very risky third bail-out. Nonetheless the central banker gave a good hint about that, by stating that “people are turning to the central bank on issues that demand a political rather than technical response”. In reality it was the ECB that forced Tsipras and the Greek government to capitulate. Up to the point where the ECB cut off the Greek banks from any liquidity sourcing, Athens had been steadily rejecting the demands of its creditors, denying to ignominiously cut down pensions and increase taxes in order to service a monstrous debt. To be noted that the International Monetary Fund is convinced that the debt is not sustainable as it stands.

The ECB did the job

As it turns out now the Tsipras government had been drafting plans for a Grexit, if the euro area partners insisted on more severe austerity measures. Evidently Greece chose to stay in Eurozone, but many people wonder why and how Tsipras was convinced. It seems that the ECB was deeply involved in that. Even before the 12 July – when the 19 Eurozone heads of state and government were shut away for 17 hours to formulate the terms of the harsh austerity measures that Greece was supposed to take – Athens had already capitulated. Nobody has told us directly how Tsipras was forced to do that, but the broad lines cannot be hidden.

It’s obvious though that the ECB had played the crucial role in that. It was the central bank’s Governing Council which did the dirty job of the politicians to convince Tsipras to comply. To do this the ECB abruptly cut down the liquidity financing to the Greek banking system, forcing Athens to impose capital controls to avoid instant death. The euro area political leaders on 12 July just formulated the details of the bail-out and victimize both the country and its prime minister.

On the opposite side

On 6 July the Sting wrote “During the arduous negotiations to settle the Greek problem, the ECB has been sitting on the opposite side of the table together with the IMF and the EU Commission facing an isolated Greece. It was the first time in the history of the IMF that a country asking for a bailout due to a sovereign debt crisis has its central bank sitting on the same side of the table with the Fund. This arrangement has left the poor country alone to face the omnipotent Fund without the help of a central bank or decisive backing from its Eurozone partners. It was EU-ECB-IMF versus Greece right from the beginning”.

It’s a fact then that the power leverage that made Tsipras and Athens to capitulate to the demands of Berlin, Paris and Brussels was the ECB. Cœuré says it almost plainly: “…the ECB functions on the following principle: the Governing Council has a discussion, it then votes if necessary, before moving on to something else. And that works!” The reader should pay attention to the exclamation mark, because it is probably an indirect way to underline how Greece was molested. This is exactly how the ECB decided to cut off the liquidity life line to the besieged Greek banking system condemning it to introduce capital controls and forcing Tsipras to yield to the demand of the creditors. Cœuré is right that there was no other mechanism built-into the treaties of Eurozone to make Greece either exit from the euro area or capitulate. For the time being the country took the second choice but it seems that the first one is still open.

Change the Treaties

Cœuré goes even further and discloses his ‘political’ proposals about how Eurozone should be institutionalized in a better and more functional mode. To this effect he stated to Marie Charrel of ‘Le Monde’ newspaper that, “By understanding that replacing the intergovernmental process with shared decision-making will not diminish the sovereignty of member countries. On the contrary, it will provide more room for the political dimension by ensuring shared responsibility that will enhance mutual trust…Take as an example the implementation of the European fiscal framework, which has become complex and opaque. If there were European fiscal instruments that were discussed within a “ministry of finance” for the euro area, under the watchful eye of the European Parliament, political discussion would regain its clout…”.

In reality, this director of ECB ventures to singlehandedly write down a new EU Treaty providing for nothing less than a European ministry of Finance. He forgets though that a similar plan was concisely rejected by the French and the Dutch people in the 2005 referendums held on a Treaty meant then to establish a Constitution for Europe. Then came the much watered down Lisbon Treaty.

Doing the politicians’ dirty job

In short the ECB or at least some of its directors are now openly accepting that in the case of Greece the central bank did the politicians’ dirty job. Yet Cœuré doesn’t hesitate to go as far as to propose the creation of a central political authority in the Eurozone, a ministry of Finance, which will decide by a qualified majority vote, as the Governing Council of the ECB does. Not a word is spoken though about creating also a safety valve against the aggression of the large countries against the smaller ones. In the US this role of is undertaken by the prestigious US Senate, where all the member states of the union are represented on an equal footing regardless of population and have exactly the same voting rights. Would Germany ever accept to have in such a powerful body the same voting rights as Greece? This is exactly the question Eurozone has to answer in order to avoid the worse.

The story of Greece tells us clearly that the ECB has to be refrained in some way or another, because instead of supporting a poor country which it was supposed to serve as its central bank, it stood on the other side of the table with the creditors, enforcing the will of the powerful against the weak. And the ECB does that without any democratic or judiciary control. This is exactly what happened in Ireland in 2010. But the Eurozone cannot live very long with that.