(The interview appeared in SAFE Newsletter Q1 2016)
Helmut Siekmann holds the Endowed Chair of Money, Currency and Central Bank Law at the Institute for Monetary and Financial Stability at Goethe University Frankfurt and belongs to the core researchers of the SAFE Policy Center. His research focuses on all aspects of government finances, the institutional framework of the European System of Central Banks, the European provisions to secure stable government finances, the stabilization mechanisms in times of crisis and the supervision and control of financial markets.
The European Central Bank (ECB) still plays a major role in fighting the consequences of the European sovereign debt crisis. Its latest move is to provide massive liquidity to the markets to boost the economy by buying government and corporate bonds. Is this measure of “quantitative easing” (QE) legal?
In principle, the ECB is allowed to buy bonds in the open market according to its Statute. However, this right has to be limited to purposes that lie within the competences of the ECB, which are restricted to monetary policy. To be equipped with an instrument does not mean that you can use it for any purpose. So, if the objective of QE is to solve structural problems in some of the euro member states, this would be, to my opinion, general economic policy which is definitely in the domain of the member states and not the ECB.
Would it solve the problem if the ECB mandate were to be extended to include economic policy, as is the case in the U.S.?
Of course, the competences of the ECB can be amended. However, this is a very complicated procedure, including referendums in several member states, and could cause new legal problems. For example, such a change might not be compatible with the democratic principle in Article 79, Par. 3 of the German Basic Law because it would give a tremendous amount of power to an institution that is basically not under democratic control.
But apart from these legal hurdles, such a move would not solve the underlying problems. With only the instruments of a central bank, you cannot overcome structural problems. You can only buy time. Once you reach the lower bound and the member states have not implemented structural reforms, nothing will be won. And, on the downside, QE causes a lot of risks. It brings down interest rates for a long time which completely distorts financial markets. The danger arises that money is invested in risky or ineffective investments that have no basic returns. And, not least, the pressure on governments to consolidate their budgets and to follow sound fiscal policies is released – with severe consequences: When interest rates suddenly go up, many entities would be immediately bankrupt. Germany could face a sudden budget deficit of up to 40 billion euros, not to speak of Italy or France which have a much higher debt level. In general, interest rates would lose their function to allocate capital to its most beneficial use.
By the way, the U.S. Federal Reserve System does not have a general competence for economic policy either, even though its competences are wider than those of the ECB. It is an open question if the Fed would be allowed to perform structural economic policy. It would be definitely forbidden to use economic measures discriminately for only a number of states – as we have seen in Europe with the ECB’s OMT program (see Siekmann 2015a and Siekmann and Wieland 2013). From this aspect, QE is less problematic as it does not favor certain member states or their banks. Still, it can be seen as indirect financing of sovereign states.
Many people argue that we are in a situation of fiscal dominance where the ECB has no choice but to act the way it does because the member states’ governments are not consolidating their budgets.
From the legal point of view, it is questionable to argue that the ECB has to transgress its competences because others are not fulfilling their duties. From an economic point of view, this argument has some merit. In the beginning of the crisis, Jean-Claude Trichet, the former ECB President, always stressed that he would use these unconventional measures only for a short period to provide the time needed for the member states to act. No other institution in the Eurozone was able to act quickly enough at the time. But now, six years later, this argument has become weaker and weaker.
But does the ECB not have a mandate to fight deflation?
The ECB often bases its arguments on an inflation target of little below two percent. But this is a self-set goal. The term “inflation target” cannot be found in the Statute or any other part of the primary law of the EU. The objective set there is price stability which means zero percent plus maybe a certain margin to control for measurement failures (see also Siekmann 2015b). In my view, it is more the wish for some inflation than the fight against deflation that drives this policy. Inflation is to the detriment of people who have monetary claims while debtors profit from it. So, any kind of inflation has distributional effects between member states and, within states, between certain parts of the population. In Germany, most people tend to have bank accounts and other types of savings whereas in other European countries people invest more in real estate which is usually credit-financed. And the biggest debtors are states. In my view, this is why a certain level of inflation has become an accepted policy goal. But it is not the job of a central bank to change the distribution of wealth.
When you take the example of “Emergency Liquidity Assistance” (ELA), do national central banks in Europe have too much power?
It is legally highly questionable that national central banks are allowed to grant ELA. In the Statute of the ECB and the ESCB, the European System of Central Banks, this can only be based on a very opaque clause, Article 14, Par. 4, which says that national central banks may perform functions on their own responsibility and liability, but only when these do not interfere with the objectives and tasks of the ESCB. To my interpretation, this clause only allows measures which could not be considered as monetary policy, such as for example banking supervision. ELA, however, usually comes into play when the ECB has to reject further credit to a bank or a banking system of a member state. When you take the Greek example: as long as the government bonds that the Greek banks held were considered worthy, Greek banks used these as collateral to obtain liquidity from the ECB. But once the ECB did not accept them anymore, the national central bank stepped in and granted ELA. So, if you call the ECB’s liquidity provision monetary policy, what else is ELA? But the ECB set up a procedure according to which it would not object assistance granted by a national central bank as long as it is for a limited time and stays within a limit specified in advance. From a legal point of view, this is a somewhat awkward construction and lacking a sound basis.
Is this balance of competences between the center and the branches better organized in the U.S.?
The most important difference between the European and the U.S. system is that the regional branches of the Federal Reserve System act within economic and not political boundaries. The reason is that they are owned by the local commercial banks and, thus, are more private than public law entities. So, they do not see themselves as representatives of a certain state. In Europe, we have always the danger that national politicians put pressure on their central bank governors to vote in the ECB council according to political needs of their home country. And although you cannot prove it, indications exist that the national biases may play a role in the decisions of the ECB council.
Siekmann, H. (2015a)
“The Legality of Outright Monetary Transactions (OMT) of the European System of Central Banks”,
IMFS Working Paper No. 90.
Siekmann, H. (2015b)
“The Legal Framework for the European System of Central Banks”,
White Paper No. 26, SAFE Policy Center.
Siekmann, H., Wieland V. (2013)
“The European Central Bank’s Outright Monetary Transactions and the Federal Constitutional Court of Germany”,
White Paper No. 4, SAFE Policy Center.