Draghi indirectly accuses Germany of using double standards in financial issues

European Parliament. Committee on Economic and Monetary Affairs (ECON) meeting. Hearing with Mario Draghi, President of the European Central Bank and the European Systemic Risk Board. (EP Audiovisual Services 3.3.2014).

European Parliament. Committee on Economic and Monetary Affairs (ECON) meeting. Hearing with Mario Draghi, President of the European Central Bank and the European Systemic Risk Board. (EP Audiovisual Services 3.3.2014).

Last Monday, Mario Draghi, the President of the European Central Bank appeared in his last hearing in the Committee on Economic and Monetary Affairs of the European Parliament, before the present legislature dissolves in view of the May elections. In his introductory speech he seized the opportunity to underline a few things that some European governments tend to forget, in relation with the mandate of the ECB concerning the purchase of government bonds. Currently, the German High Court has transferred a relevant case to the European Court, questioning the legality of ECB’s Outright Monetary Transactions (OMTs) in the secondary sovereign bond markets. This program was announced in August 2012, “to safeguard an appropriate monetary policy transmission and the singleness of the monetary policy”.

The German Central Bank, the famous Bundesbank, currently questions the legality of the OMTs, arguing that they fall outside the mandate of ECB as described in the EU Treaties. The real reason is that Germany doesn’t want the ECB to help other Eurozone governments by purchasing their sovereign bonds in the secondary market and thus indirectly helping them finance their fiscal deficits cheaply. This attitude falls within the German austere economic ideology, which demands that all Eurozone member states act like Germany in controlling and eventually zeroing their fiscal deficits. To be noted that the ECB hasn’t spent anything under the OMTs, yet it has manage to help Italy and Spain borrow at lower interest rates. It seem Germany doesn’t like that either. Let’s take one thing at a time.

German stubbornness…

In view of this reality and the German stubbornness, last Monday, Draghi decided to take a stock of ECB’s actions during the past five crisis years. His target could be to denounce Germany as acting hypocritically using double standards, when contesting the currently in force OMTs, which are meant to help countries like Greece, Italy, Spain, Portugal, Ireland and the other crisis hit Eurozone member states.

Germany in direct contradiction with its present attitude, back in 2010 was pressing hard and convinced the ECB to bailout its major commercial banks. Here is how. As everybody knows on that occasion Greece, Portugal and Ireland were about to fail on their financial obligations. The three countries, including their sovereigns and commercial banks, had large obligations to German lenders which couldn’t be honored.

The crisis first broke out in Greece in the spring of 2010. Then Ireland and Portugal followed. The German banks, including the Deutsche Bank, had large exposure to those countries. If the three countries were left to fail, the domino effect would have brought down the entire financial system of Eurozone. However, the large exposure of the German banks to the three countries was not a one-sided work. The German lenders, by lending hundreds of billions to those countries (sovereigns and local banks) were equally careless and imprudent as the borrowers.

…and double standards

Germany though refused to accept a part of the responsibility. Berlin wanted it all. Last Monday, Draghi observed that “In May 2010…We responded by introducing the Securities Markets Program, focused on purchases of government bonds”. He didn’t elaborate on that. He could have told the MEPs that the ECB at that time directly purchased the government bonds of the three crisis hit countries at face values in order to repay the German loans at nominal value. Never in the banking history of the last one hundred years were the lenders paid their loans at nominal values after a crisis. In the Latin American debt crisis the New York banks received less than half of their initial loans.

But Berlin, using its political clout, forced the borrowers to pay its banks at full face value. Of course it was the money of the ECB, which through the Securities Markets Program, was directed to the German banks, while at the same time it was charged to the poor taxpayers of Greece, Ireland and Portugal. In short, Berlin convinced the ECB not only to directly buy sovereign bonds but to pay at nominal values loans which were worth much less. Germany then didn’t question the legality of the Securities Markets Program nor did it raise objections if it fell within the mandate of ECB.

Draghi sees the connection

On Monday, Draghi connected directly the SMP of May 2010 with the OMTs of September 2012. He described the latter as the natural continuation of the former. He added that, “As you know, the integrity of the euro area is an absolute precondition for us to be able to deliver on the mandate prescribed by the Treaty and in particular to ensure a smooth transmission of our monetary policy. In order to preserve this integrity, we thus announced our readiness to conduct Outright Monetary Transactions with the specific purpose of removing compensation for that risk from the financial pricing of securities… All our measures, standard and non-standard, have been taken to serve our primary objective of maintaining price stability”.

With this short paragraph Draghi defends the OMTs and indirectly exposes Germany’s double standards. He didn’t say anything close to that. Nevertheless by reminding everybody that the OMTs are a direct continuation of the SMT and knowing that everybody is aware what really happened in 2010, he made sure that the message was delivered. The European Parliament was the best place to do this.

Unquestionably, during the past five crisis years the European Central Bank has emerged as the EU institution (albeit with responsibility only in Eurozone) with an authentically European vision away from the direct supervision of national governments. Only the European Parliament enjoys a similar independence, while the Commission also functions as an independent institution, but national governments have a strong presence in the corridors of the Berlaymont building. As for the Council and the Eurogroup, they are made up by the member states, where unfortunately Germany prevails. Draghi had also a well-targeted statement when he said to MEPs, “Moreover, the hearings have always been a welcome occasion to discuss the state of Economic and Monetary Union between two genuinely European institutions”.

Of course he meant that the other institutions are not so “genuinely European”, obviously because they primarily serve national interests, and he is quite right about it.

 

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