The European Central Bank as Hostage

The European Commission’s proposal for a ‘next generation’ recovery fund is an important step in forging a common response to the economic challenges that will follow in the wake of the COVID-19 crisis. Together with fiscal efforts at the national level, this fund should add useful stimulus to European economic performance. What remains to be seen is how the negotiations will play out within the European Council. There is reason for optimism but also reason for caution in that respect.

Meanwhile, the European Central Bank remains the primary source of macroeconomic stabilization. When the ECB’s Governing Council meets on 4 June, we should expect to see them add more stimulus of their own into the mix. The pandemic emergency purchase program will need to be larger. The Governing Council may need to adjust some of its other instruments as well. But Europe’s heads of state and government should be under no illusion that such actions will solve Europe’s macroeconomic problems or that they take any pressure off the European Council in agreeing on an ambitious recovery fund. The ECB can buy more time, but it cannot be the only game in town. And, as we have seen, even buying time is getting expensive. Increasingly, the Governing Council finds itself in situations where it is damned if it does and damned if it doesn’t: The ECB is a hostage to the effects of this crisis, to the actions of the European Council, and to the economic and political consequences of its own policy response – both real and imagined.

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Why Is the ECB Politically Independent?

The recent decision by the German Constitutional Court has triggered an avalanche of commentary about the primacy of European law and about the political independence of the European Central Bank. These are important issues for debate. I am persuaded by colleagues like R. Daniel Kelemen, for example, that you cannot have a ‘rule of law’ in Europe without a clear hierarchy of legal interpretation. Hence, while I can see the point being made by the German constitutional court about its obligations to uphold the constitutional rights of German citizens, I can also see why the European Court of Justice would insist on having the last word in any assessment of whether a European institution acted within its European mandate.

By contrast, the debate about the political independence of the ECB has taken a detour. The focus lies too narrowly on whether complying with the German court would or would not violate the ECB’s political independence given the wording of the Treaty on the functioning of the European Union and the Statute of the European System of Central Banks. That focus is too legal and in any event crabwalks back into the debate about the primacy of European law. The focus should lie on why the ECB is politically independent instead. Along the way, we should ask whether that independence is necessary for the ECB to forge an effective response to the current economic crisis.

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An East-West Divide in Europe?

There is a big conversation brewing about the deepening East-West divide in the European Union.  Much of this conversation started long before the pandemic.  Social scientists like R. Daniel Kelemen have been worried for a long time now about the diverging trajectories in democratic institutions and about the possible roles that European Union (EU) institutions may have played in supporting that evolution.  More recent scholarship shows how the onset of the COVID-19 pandemic has exacerbated that tension.  This raises questions about whether such developments were always likely to happen, and about how we can better understand East-West relations in Europe.  Fortunately, three brilliant new books promise to help in that understanding.  The first, by Larry Wolff, examines the role of Woodrow Wilson in help shaping the politics of Central and Eastern Europe.  The second, by John Connelly, explores the evolution of East European nationalism.  The third, by Lenka Bustikova, examines the problem of extreme right mobilization.  The conclusion I take away from these books is that there are important political dynamics at work in Eastern Europe that need deeper understanding; it is not that East and West are fundamentally different.  We can learn a lot from the study of Eastern Europe as we struggle to interpret developments elsewhere as well – Western Europe very much included.

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This Is What European Disintegration Looks Like

The European Council decided during a summit organized to address the COVID-19 crisis on 23 April to confirm a European Commission program to support national insurance systems. They also approved a program by the European Investment Bank to support lending to small and medium-sized enterprises, and another by the European Stability Mechanism to make loans available to national governments to pay for health care expenses related to the pandemic. Finally, the Council asked the Commission to set out a roadmap for the creation of a ‘recovery fund, which is needed and urgent’. Supporters of the decision hailed it as an unprecedented leap toward a Europe of solidarity; critics decried it as vague and insignificant. They are both wrong and right at the same time.

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Getting Ready for the 23 April European Council

The European Council will meet by video conference next Thursday.  When it does, the three main items on the agenda will be to approve the recommendations made by the Eurogroup on 9 April, to push forward the conversation about a European Recovery Fund, and to restart and restructure the talks about the upcoming multi-annual financial framework.  In English, that means the conversation will be about money.  Like any conversation about money it will be difficult.  The opportunities for misunderstanding are everywhere.  Now is a good time to sort out some of the issues.

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Why Share Risk through the ECB?

I am an American – an outsider – not a European. I have been studying and living in Europe for a while; I wrote my doctoral dissertation on Dutch politics; I spend more time now looking at politics in Italy. Alongside that political interest, I have spent much of the past thirty years looking at European monetary integration. Europe has taught me a lot, but there are still many things I find confusing. Top of the list right now is that the governments of the euro area would rather accept a higher shared risk in the ECB than they would face if they agreed to share risks through an institution specifically designed to raise credit in the markets. This strange choice about how to share risks matters because the risks the European face have never been greater.

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Paolo Gentiloni: Macroeconomic Governance in the Crosshairs

Paolo Gentiloni began his tenure as European Commissioner today by giving an interview in Corriere della Sera. He spoke about a number of the major issues the new Commission has to face, but the part of the conversation that made the front page ran something like ‘the reform of the European Stability Mechanism is not a threat.’ Flip to page three and the title is even more explicit: ‘There is no plot in Brussels against Italy.’ European macroeconomic policy coordination is politically explosive. Gentiloni is the Commission’s first line of defence.

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The Battle for Post-Crisis Europe

Europe needs a ‘new narrative’ if it is going to move forward rather than falling back into crisis.  That narrative cannot be a collection of policy initiatives or institutional reforms.  New policies are important; so are new institutional arrangements.  But politics and institutions do not by themselves speak to a democratic electorate – and particularly not to an electorate that has focused its attention on legitimate grievances of its own.  Only politicians with a clear vision of the future can wield influence with voters in such a context.  If the politicians with the best ideas are too afraid to forge a vision, they should not be surprised when voters attach themselves to politicians who run off in the wrong direction.  Europeans deserve better political leadership; so does Europe.

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Central Bank Independence and the Future of the Euro

Central banks are never independent from politics. The bankers who run those organizations may have the institutional power to define their own objectives, the technical capability to adjust the settings on their monetary instruments, and strong legal protections around the terms and conditions for their employment. But none of that is enough to insulate them from politics. Determined politicians will find a way to exercise influence, no matter what the obstacles. More often than not, such politicians will do so without even implicating the legislative process. They do not have to rewrite the laws to violate central bank independence. Politicians only need to take advantage of the fact that central bankers come from society, they (and their families) have to live somewhere, and eventually they will also retire.

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Sovereign Debt Restructuring and Debt Mutualisation in the Euro Area

The euro area lacks a framework for sovereign debt restructuring and it lacks a common risk-free asset. Both issues are important in looking ahead to the prospect of any future crisis. Of the two, however, the creation of some kind of sovereign debt restructuring mechanism appears to attract the most political attention. This briefing note outlines the issues that would need to be addressed to bring greater stability to the euro area.

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