May 20, 2012 6:30 pm
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Desperate times call for desperate ECB measures
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Jacek Rostowski
At that time Poland (which then occupied the European Union presidency) together with Italy and Spain, insisted that the creation of an effective firewall against the eurozone sovereign debt crisis spreading from country to country, must precede the imposition of capital buffers.
Solemn undertakings to this effect were made by all. The capital buffers were to come into effect only after the firewall was in place. In fact, nothing of the kind happened. Europe was only saved from massive deleveraging in the banking system, and an ensuing depression thanks to the European Central Bank flooding European banks with liquidity through its longer term refinancing operations – action that would not have been necessary had the firewall already been in place.
We cannot afford to make the same mistake again. This time a properly functioning firewall must be in place to prevent contagion well before Greece leaves the euro.
Considerable progress has already been made by the EU to ensure that, if the eurozone manages over the next few years to overcome its present problems, dangerously high debt levels will never again be allowed to threaten its integrity. Of particular importance in this regard are the six legal acts relating to fiscal policy that were agreed under the Polish presidency in September. But the “if” required is pretty big.
Of course, the best solution to the immediate crisis would be for Greek voters to choose a government next month that would honour its obligations to undergo structural reform and fiscal consolidation. If this happened, Greece could remain in the eurozone.
But to be brutally frank, such a positive outcome to the Greek elections is unlikely unless the probable catastrophic costs for the rest of the eurozone of a Greek exit are credibly eliminated. Greece’s gross domestic product has fallen by about 20 per cent since 2008 and knowing the possible consequences for the rest of Europe of its default, we should not be surprised if many Greek voters decide to call what they perceive as the eurozone’s bluff.
There is only one institution that can provide the firewall that Europe needs in the time we have before the Greek elections, and that is the ECB. It should immediately announce that in the event of a Greek exit from the eurozone it will stand ready to buy unlimited amounts of the sovereign bonds of countries remaining in the euro for a limited period of time – say a year or 18 months.
It is a moot point whether this is against the provisions of the EU treaties and the ECB statute. Jean-Claude Trichet, the former ECB chief, argued when he launched large scale intervention of this kind in August of last year, that when conditions prevent normal monetary policy instruments from operating, the ECB has the right – under its monetary policy mandate – to remedy such conditions. This is also the Polish government’s view.
But even if one believed that such action was normally against the treaties, Poland holds that it is justified in the case of a member state leaving the eurozone, simply because such an event is so unforeseen by the treaties.
Last autumn, Poland proposed that the mandate of the ECB should be clarified in the fiscal pact, so that there should be no doubt that the central bank could intervene in sovereign bond markets if it considered that the integrity of the monetary union was threatened by contagion. Such a decision would, of course, be made entirely independently by the Bank.
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Unfortunately, the UK’s unwillingness to join the fiscal pact made it an intergovernmental treaty, and thus unable to affect EU treaties. This meant our proposal fell by the wayside.
Today, we are generally in a worse position than six months ago. But in one respect we are better placed. We need the ECB’s readiness to intervene massively in sovereign bond markets only in the case of a country actually leaving the euro. This is an extremely well defined event. Therefore, such intervention would not cause moral hazard, which is – understandably – the main fear of both Germany and the ECB.
After all, no country will leave the eurozone and bring economic catastrophe upon itself so other countries would benefit from the ECB’s intervention. Moreover, by reducing the consequences of an exit for those remaining in the eurozone, and thus increasing the credibility and probability of exit for the persistently wayward, the ECB would actually increase fiscal discipline in the monetary union also in the medium term, and thus reduce moral hazard.
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The writer is Poland’s finance minister
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Copyright The Financial Times Limited 2012.
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