eye on the economy
‘Citizens cannot be blamed for seeing conspiracies when things that affect them so profoundly are decided in the dark’
when under fire from ProfMorgan Kelly, the ECB’s actual mandate focuses narrowly on monetary policy – the con- trol of inflation, largely through interest rates. It was given no clear role in the othermajor functions of a central bank – stability of the banking system, and lender of last resort. It is now criticised for not doing enough of the former before the crash, and doing too much of the latter since. We will never know if an ECB with supervisory powers
would have made a better job of deflating the bubble than the actual regulators did. Given their widespread global failures, the answer is probably not. The ECB’s massive loans to the Irish banking system are to some extent the opposite approach; taking action, without clearly having the formal power to do so. But then, neither does anyone else have such powers. The
national central banks in the eurozone lost their ability to write their own cheques when the single currency was formed. The Irish Central Bank is doing so – over €50bn to date – only under the aegis of the ECB and because the Irish government has guaranteed the loans. The great British political economist in the 19th century,
Walter Bagehot, wrote that central banks should lend without limit to solvent banks (although at a high interest rate, he thought) but wind up insolvent ones. This maxim has been widely ignored internationally in the great crash, because of the perceived dire consequences, but the dan- gerous consequences of not following it are also on view; nowhere more so than in Ireland. The policy has been tomake the banks solvent with huge
injections of public capital. That being the case, it is only logical that the Central Bank should provide whatever loans are needed until everyone is convinced that the remaining Irish banks are indeed solvent, or to assist in the wind down of the ones deemed to be beyond rescue. The Irish complaints about the ECB therefore seemillog-
ical. They are illogicalwhen expressed – as is often the case – merely because of the enormous size of the ECB loans. The Irish banks had those liabilities anyway; they have merely changed creditors. If the newly capitalised banks are solvent, the ECB fund-
ing is not a problem. Indeed, the cheap rate counts as a profitable subsidy. The real complaint is that the banks are not solvent, even after €40bn of capital, and the lending is therefore wrong and dangerous. Behind that lies the basic question: whose policy was it?
20 Irish Director Summer 2011
Fatal flaw This is another flawin the architecture. It should be the job of central banks and regulators to decide whether a bank is insolvent.What to do about that, though, is a matter for government. If it wants to carry the cost and risk of rescu- ing insolvent banks, it should provide the cash and guaran- tees and tell the central bank to get onwith the job of fund- ing them. In the eurozone, there is no such clear relationship. We
are in the dark as to the extent to which rescuing the Irish banking system was an Irish idea, an EU idea or an ECB idea, and the role which each played. The latest dose of bad blood came over the ECB’s role in
promoting – even forcing – the EU/IMF bailout in December, at a time when the Exchequer did not need the funds. This criticism does seem to miss the point. If a deci-
sion to save the Irish banks had been taken, it is the proper function of the Central Bank to decide how best it should be done. In this case, the ECB believed – even if perhaps erroneously – that, with deposits flooding out, ensuring the State was financed for four years was the best option. But the ECB should not be the sole arbiter of whether a
bank or banks should be rescued. The real crisis is that in this case, as in so many other things to do with the euro, no one is the final arbiter. The EU Commission might be a possibility, but it is
increasingly sidelined with nothing coherent in its place. National governments, who have the titular power over
their own banks, are subject to secret pressures from other governments, inside and outside the shadowy, secretive summit meetings of the European Council. Citizens cannot be blamed for seeing conspiracies when things that affect them so profoundly are decided in the dark. The missing bits of the edifice begun at the Dublin sum-
mit must now be constructed. This cannot go on. In a recent lecture on EU institutions, political scientist Brigid Laffan quoted JeanMonnet, regarded as the founder of the idea of European union: “Nothing is possible without men; nothing is lasting without institutions.” Unless the men, and now women, who lead the eurozone
recognise the truth of that, and pretty quickly, their great project seems unlikely to last.
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