The European Central Bank: Under German Influence? (2/2)
The arrival of Mario Draghi as president of the European Central Bank (ECB) in 2011 opposed the ordoliberalism advocated by Germany. The previous June, the ECB was fully devoted to German economic policy. But is a policy change really possible? To answer this question, Le Journal International tries to decipher how the ECB functions.
“Inflation is not the result of a curse or tragic fate but of a frivolous or perhaps even criminal policy.” This 1960 statement from Ludwig Erhard, the second Chancellor of West Germany, left little doubt as to the major concern of German leaders.
The German Model Inscribed in Treaties
The hyperinflation of 1920 still haunts contemporary economics. In 1991, François Mitterrand’s France wanted a transition to a single currency. Helmut Kohl’s Germany accepted, in exchange for an agreement that put forth similar conditions to those predicted by the European Monetary System (EMS). Among them, Germany wanted to impose an anchoring policy on the deutsche mark, a submission to the monetary orthodoxy dictated by German finance authorities. Additionally, the headquarters of the ECB is located in Frankfurt, which is anything but a coincidence since the same city also hosts the Bundesbank, the German Federal Bank. Germany’s economic policy was thus developed at the time of the Maastricht Treaty.
Germany’s 20 million retirees receive payments based on a funded pension system. A rise in inflation would lead to a drop in the workforce value that finances these pensions. Germany practices and imposes on the European Union the competitive devaluation strategy, meaning it increases exports by the reducing wages. “[Germany] has created one of the best low-wage sectors in Europe,” Mr. Schröder told a crowd at the 2005 World Economic Forum in Davos.
By way of this anti-inflation policy, the ECB puts pressure on the wages of the Eurozone’s member states. This position opposes those of the Federal Reserve of the United States or the Bank of Japan, which aim to generate growth and employment.
Mario Draghi and the turning point of 2011:
Then came a dramatic turn of events when, in 2011, Jürgen Stark resigned as the chief economist of the ECB due to “personal reasons.” He deeply opposes the policy driven by the new president of the ECB, Mario Draghi, which consists of a massive buy back of European countries’ public debt securities. The OMT programme (Outright Monetary Transactions) was created the following year and allows the ECB to buy back Eurozone countries’ sovereign, short-term bonds.
This practice truly opposed the treaties. The system helps directly finance banks and member states. Concerning this policy, Jens Weidmann, the president of the Bundesbank threatens to call upon the Constitutional Court of Karlsruhe. The motive: violation of the ECB treaties. According to Jean-François Bernard, a French economist and high-ranking public servant, “it is absolutely illegal but it is the right response to rein in those capitalizing on sovereign debt.”
Several scenarios could play out. One involves Germany’s exit from the Eurozone. In another the treaties harmonize with the current economic policies of the ECB. But this would require a long, complicated process of ratifications in every country. It is no doubt for this reason that the Constitutional Court in Karlsruhe finally got behind the OMT programme.
“Preferable to not be isolated”
The system put into place at the heart of the Governing Council does not benefit Germany. The “one nation = one voice” model, in fact, sets Germany on equal footing with other members. Take for example Cyprus, which represents 0.1% of the zone’s GDP, against Germany’s 30% representation. This model should be put in perspective, however, since there is a certain GDP weighting of the nation in the ECB protocol [article 10, paragraph]. Faced with the Governing Council, it is preferable to not be isolated.
“The ECB owes nothing to an adversary with no name, no face, no political party, who will never present an application and thus will never be elected, but governs nonetheless. This adversary is the world of finance.” (François Hollande)
Banner photo: Building of The European Central Bank’s. Credit MPD01605 (Flickr).
Amoureux de ma Bretagne et des Balkans.