Draghi Almighty: Why ECB Bond-Buying Plans Undermine Democracy

A Commentary by Armin Mahler

The ECB's plan to restart its bond-buying program is possibly the most important decision of the euro crisis. But the bank is not subject to control by national parliaments. Europe's leaders seem to consider saving the euro to be more important than preserving democracy.

ECB President Mario Draghi Zoom
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ECB President Mario Draghi

Anyone who breaks a law can hardly excuse his actions by claiming that he is acting within the scope of the law. In any case, it won't help him much -- unless his name is Mario Draghi and he is the president of the European Central Bank (ECB).

The ECB is politically independent, but it is not above the law. It is only independent within its mandate, which is clearly defined by the European treaties: The central bank is tasked with safeguarding price stability in the euro zone -- no more and no less.

Draghi wants more, though; he wants to save the European common currency at all costs. The euro, he says, is "irreversible."

Many similar statements have already been made over the course of the euro rescue. There is no alternative to the measures that have been agreed, said German Chancellor Angela Merkel. But aside from the fact that there are always alternatives, the chancellor has been democratically legitimized; anyone who disagrees with her actions can punish her at the polls in the next election.

Momentous Decision

Draghi, on the other hand, has no democratic legitimization. And yet he has taken it upon himself to make the most important and possibly momentous decision in the history of the monetary union: defending the euro at all costs. Jens Weidmann, head of Germany's central bank, the Bundesbank, is the only member of the ECB's Governing Council to vote against this decision.

In the future, the ECB will be able to purchase sovereign bonds from crisis-ridden countries, provided these member states have already requested aid from the euro-zone rescue fund and meet the strict conditions that naturally go hand-in-hand with such a bailout. And what if they fail to meet these conditions? Will the ECB halt its purchases? The bankers won't be able to do that if Draghi's comment about the irreversibility of the euro is to be taken seriously.

So far, the ECB has already spent over €200 billion ($256 billion) buying sovereign bonds from crisis-stricken euro-zone countries. If the exception now becomes the rule, additional bonds worth hundreds of billions could quickly follow. German taxpayers are also ultimately liable for this amount -- without the German parliament, the Bundestag, having a say.

This Wednesday, Germany's Federal Constitutional Court is expected to decide whether the European Stability Mechanism (ESM), the permanent successor to the current rescue fund, is compatible with the German constitution. At stake here is the democratic legitimization of the euro rescue funds and the financial risk for Germany. It is seen as likely that the judges will put a ceiling on Germany's liability. But in view of the latest ECB decision, such limits are already useless before they have even been enacted. The ECB apparently stands above the Bundestag and above the Federal Constitutional Court.

Double Game

And what is the German government doing? It's playing a double game. It supports both the ECB president as well as his main critic, Weidmann. Merkel is secretly pleased with Draghi's initiative because the chancellor would probably not be able to gain majority support in the Bundestag for additional euro rescue programs. That's why she is among those saying that the ECB is acting within the scope of its mandate.

If she said anything else, she would have to take action. She could, for example, file a suit with the European Court of Justice in Luxembourg in a bid to have the ECB decision nullified. The Bundestag could also pass a resolution calling for such a lawsuit -- and thus force Merkel to put her cards on the table.

But if there are no plaintiffs, no judges will intervene. In such a situation, Mario Draghi is the most powerful man in Europe, undeterred by courts or parliaments.

The euro may be irreversible, but apparently democracy is not.

Translated from the German by Paul Cohen

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1. Caught Between a Rock and a Hard Place
kogiks 09/10/2012
---Quote (Originally by sysop)--- The ECB's plan to restart its bond-buying program is possibly the most important decision of the euro crisis. But the bank is not subject to control by national parliaments. Europe's leaders seem to consider saving the euro to be more important than preserving democracy. http://www.spiegel.de/international/europe/0,1518,854851,00.html ---End Quote--- Indeed the ECB mandate is maintaining monetary stability period. But the various EU institutions are now incapable of doing anything more to deal with the worsening EU financial crisis. Bond buying by the ECB is indeed risky if the bonds go bust. But it's the only remaining course of action available unless a complete meltdown of the monetary union is acceptable. In a situation like this being legalistic is the least helpful. Procedural imperfections may nonetheless be quickly adjusted if necessary.
2. Thank God for Draghi
alfredmifsud 09/10/2012
Draghi is doing a fantastic job in keeping the Euro together and allowing space for polticians to take European integration to the next political level. He has made a clear case that he is acting within the ECB mandate and his record on inflation control remains as good as that of his predecessor. He has the support of all the Executive Committe bar one, consensus minus one, and that shows he is not riding roughsod over anybody's head but he is carrying the corpse of the ECB with him and has earned poltical support both from the Commission and from the main EU governments. He is democratic as his mandate and that of his colleagues on the ECB executive committee has been given by duly elected representatives of the people and in modern democracies Draghi is representing the fourth branch, after the executive, the legislative, and the juridical now we have the monetary and economic column of democracy. Without the initiatives spearheaded by Draghi in the ECB we would have no Euro, and no EU, we would wirte-off sixty years of European integration and Germany would become feared rather than loved. Does Weidmann need to re- read history bboks?
3. Outright Monetary Transactions Are ILLEGAL!
blankfiend 09/11/2012
Article 123 of the TFEU, and Article 21.1 of the Statute for the ESCB and ECB state: "Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments." While Mr. Draghi claims compliance with these Articles by affirming that the ECB is not going to buy in the primary markets, he ignores the prohibition against the establishment of a credit facility in favor of central governments. It would be exceeding difficult to deny that the OMT is a credit facility in favor of central governments, which is obviously explicitly prohibited. Article 122 of the TFEU, which has been used to justify the EFSF and ESM, does not apply as it only pertains to actions of the Commission and the Council - NOT the ECB. The problem now is to find an entity with standing before the European Court of Justice to enjoin the ECB from performing OMT pending review of its legality. One potential candidate would be the Bundestag, which would have to force Merkel's hand by passing a resolution demanding that the government take action. However, an even better candidate to bring this suit would be the Bundesbank itself, as it could rightly claim that participating in OMT would compel it to act illegally by establishing a credit facility in favor of a central government. I develop these thoughts in more detail at http://blankfiendsew.blogspot.com/2012/09/the-ecb-thumbs-its-nose-at-law.html
4. Don't understand the article
BTraven 09/11/2012
As long as an inflation rate people are not capable of dealing with without reducing their living standard the ECB can buy bonds. They could be stored there for hundreds of years. It's even necessary to write them down. Prolong them.
5. Clever Entrapment
blankfiend 09/12/2012
It is not withing the mandate of any unelected central bank to cunningly ensnare people in debt union without their consent. The "safety net" thrown by the ECB is more like a fishing net which promises to further financially entangle nations without the consent of their electorates or representatives. Whatever "union" results from such base foundations has little chance of enduring, and great chance of spawning discord and the radicalization of the disenfranchised.
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