Ever since May 2010, when the European Central Bank began bailing out Greece, the continent’s leaders have sought to reassure markets that such help was a one-off measure. But there is nothing as permanent as a temporary solution. The aftershocks of the financial crash meant that Italy, Spain and Portugal would have become insolvent without the large-scale bond buying of the ECB. In return, recipient states had to swallow the bitter pill of austerity.
That the ECB effectively funds governments’ spending, in violation of European constitutional treaties, by buying their debt has been brushed under the carpet. No one could stomach the alternative policy of kicking out countries from the eurozone. Monetary financing became normalised during the pandemic when Europe, like the rest of the world, had to spend whatever it took to keep economies ticking over. This was the right thing to do.
There was always going to be a reckoning. What is at stake is nothing less than the future of the eurozone and, hence, the European Union. With record inflation and US interest rates rising, the ECB was under pressure to end its bond buying and follow suit. This week the ECB did hike rates, which will front-load member nations’ borrowing costs. But it also announced a new instrument to permit as many bond purchases as needed. For the ECB it was out with the old, in with the old.
This fudge represents a real shift in power away from “sound money” nations such as Germany and the Netherlands, which believe – in the words of Jens Weidmann, a former head of the Bundesbank – that the fact central banks can create money “out of thin air” is “nightmarish” because it leads to ruinous inflation. Opposing this view is a group led by France and Italy, whose last prime minister, Mario Draghi, had been the head of the ECB when it unleashed its unlimited firepower.
The second group of nations has long come off worse in tussles with Berlin. However, this time they had leverage because high energy prices threaten to cripple Germany, whose hard-nosed approach to debt negotiations has not been forgotten – or forgiven. European solidarity was conspicuous by its absence when Greece, Spain and Portugal all refused a request by the European Commission to cut gas use by 15% ahead of a possible winter supply crunch.
Germany used to call the shots because its debt is the eurozone’s benchmark. The bonds of weaker economies trade at a spread over Berlin’s – and if this widens too far it can make interest payments unsustainable. It was Mr Draghi who committed the ECB to buying as much debt as necessary to close these spreads, infuriating Berlin for making its voters potentially liable for the debts of eurozone members. The German constitutional court has attempted to constrain the ECB, but to little avail. There’s no sign it will have any success in the future. Yet the court posed the right question in asking how decisions that “determine the overall financial burden imposed on citizens” in Germany were not a matter for the Bundestag.
Being an EU citizen has taken on a meaning that is unmoored from national debt or taxes. For those states inside the single currency, there is no monetary sovereignty – leaving the eurozone’s central bankers to effectively decide how much a government can spend. That cannot be good for European democracy.
