ESince May 2010, when the European Central Bank began bailing out Greece, continental leaders have sought to reassure markets that the aid was a one-time measure. But there is nothing more permanent than a temporary solution. The aftermath of the financial crash meant that Italy, Spain and Portugal would have gone insolvent had it not been for the ECB’s large-scale bond purchases. In return, recipient states had to swallow the bitter pill of austerity.
The fact that the ECB is effectively financing government spending, in violation of European constitutional treaties, by buying their debt has been swept under the rug. No one could support the alternative policy of expelling countries from the Eurozone. Monetary financing normalized during the pandemic when Europe, like the rest of the world, had to spend whatever it took to keep economies going. It was the right thing to do.
There would always be accountability. What is at stake is nothing less than the future of the euro zone and therefore of the European Union. With record inflation and rising US interest rates, the ECB was under pressure to end its bond purchases and follow suit. This week, the ECB raised its rates, which front-loading member countries’ borrowing costs. But he also announced a new instrument to allow as many bond purchases as needed. For the ECB, it was over with the old, inside with the old.
This fudge represents a real power shift away from “sound money” countries such as Germany and the Netherlands, who believe – in the words of Jens Weidmann, former head of the Bundesbank – that the fact that banks power plants can create money “out of thin air” is “nightmarish” because it leads to ruinous inflation. Opposed to this view is a group led by France and Italy, whose last prime minister, Mario Draghi, was head of the ECB when it unleashed its unlimited firepower.
The second group of nations have long fared worse in the showdown with Berlin. However, this time they had leverage because high energy prices threatened to cripple Germany, whose ruthless approach to debt negotiations has not been forgotten — nor forgiven. European solidarity was conspicuous by its absence when Greece, Spain and Portugal all refused a request from the European Commission to cut gas consumption by 15% ahead of a potential winter supply crisis.
Germany used to decide because its debt is the benchmark for the euro zone. Bonds from weaker economies are trading at a spread to Berlin’s – and if that widens too much, it can make interest payments unsustainable. It was Mr Draghi who pledged the ECB to buy as much debt as needed to close those gaps, infuriating Berlin for blaming its constituents for the debts of eurozone members. The German Constitutional Court tried to compel the ECB, but to no avail. There is no indication that he will be successful in the future. Yet the court asked the right question by asking how decisions that “determine the overall financial burden imposed on citizens” in Germany were not within the purview of the Bundestag.
Being an EU citizen has taken on a meaning that is not tied to national debt or taxes. For states inside the single currency, there is no monetary sovereignty – leaving the of the euro zone central bankers to actually decide how much a government can spend. This cannot be good for European democracy.