Greece and the ECB: A Dialogue

Dramatis personae:

• Alexis - a keen eyed observer of European stuff
• Hans - a staunch defender of rectitude in all things
• Porthos - an ordinary Greek fellow
• Viktor - the worst central banker in the world

Alexis:  Has anyone noticed that the European Central Bank appears to be in the grip of fanaticism?  

Hans:  Strong words, but what could you possibly mean?  Surely the fanatics are the Greek -- or possibly German -- politicians.  You might disagree with the ECB's decisions, but that hardly justifies a charge of fanaticism.

Alexis:  Well, let's define our terms.  By fanaticism, I don't mean simply having strong views, strongly stated.   "Fanaticism," George Santayana wrote, "consists of redoubling your efforts when you have forgotten your aim."     By this definition, the European Central Bank (ECB) has lately been acting like a fanatic, and quite a dangerous one.

Hans:  Assuming I accept your definition, I still don't see your point.  The aim of the ECB is price stability.  I don't see hyperinflation anywhere in the Euro area.  

Alexis:  You may not be looking very hard; but let's set that to one side for the moment.  Your articulation of the ECB's aim is out of date.  

Hans:  Price stability is never out of date!

Alexis:  That's not what I mean.  In 2013, the ECB was given responsibilities beyond monetary policy and aims beyond price stability.

Hans:  Well, technically, I suppose.  The ECB is now the Euro area's official bank regulator.  But what's that got to do with anything?

Alexis:  And as the regulator of the Euro area banks, the ECB is charged with ensuring the stability of the financial system within each Member State.  (Note 1).

Hans:  I don't like where this is going.

Alexis:  Nor do I!  But I can't see any way to reconcile the legitimate aims and duties of the ECB with its decision to deliberately incite a banking panic in Greece.  

Hans:  Panic may be a bit of an overstatement.

Porthos:  Are you joking?  Do you know what we're doing to empty our bank accounts?  We're paying taxes!  Early!  (NY Times)

Hans:  OK, that sounds a little like panic.

Porthos:  We're dumping Euros as fast as we can in exchange for real goods -- refrigerators, washing machines, whatever we can get our hands on.

Alexis:  Sounds a little like hyperinflation, doesn't it?

Hans:  Ummm...

Alexis:  This may be the first time in history that a central bank has deliberately caused a panic in its own banking system.   And it's threatening to make things worse.  

Viktor:  Yes!  Does this mean I'm not the worst central banker in the world anymore?

Alexis:  Well...there's no evidence that you destroyed your own financial system on purpose...so you've probably got a case.  

Hans:  But look -- none of this is the ECB's fault.  It's the Greek government's: its unwillingness (or perhaps inability) to pay its debts on time, its recklessness, its fecklessness, its...grrrr.  It makes me angry just thinking about it.

Alexis:  That may be part of the problem.

Hans:  There's no way to have a sound banking system without sound public finances.  The two go hand in hand.

Alexis:  Actually, that's one of the problems that the European banking union was created to solve. (Note 2, Note 3). The ECB is supposed to be breaking the links between the solvency of particular Member States and the banks operating within them, not strengthening them.  

Viktor:  So Mario Draghi is now the worst central banker in the world?  That is so cool!

Alexis:  Maybe.  But there's still time for the ECB to recover its wits and remember its actual legal mandates.  

Hans:  OK, blah blah blah mandates, blah blah blah financial stability.  Let's get real.  

Alexis:  I'm generally in favor of real -- what do you have in mind?

Hans:  The bottom line is this.  The Greek government is a sovereign debtor.  

Alexis:  Yes.

Hans:  And it is running a primary surplus.

Alexis:  More so than ever, if Porthos is right about the tax thing.

Hans:  Which means that the Greek government can simply stop paying its debt service any time it wants.  It doesn't need more money from creditors, and its creditors can't seize its assets.

Alexis:  Yes.  So?

Hans:  So?  So?  So the only leverage we've got to force Greece to pay up is the threat that we'll destroy its banking system and cause its economy to collapse completely.  Food riots -- that's the only thing those people understand.

Alexis:  Did you just say, "food riots?"

Hans:  Did I say that out loud?  Sorry.  Forget about it.

Alexis:  Gladly.  So, we're agreed that the ECB is a central bank, not the leg-breaker for a handful of creditor governments that have gone all loan-sharky?  

Hans:  But..the Greeks!  They're GETTING AWAY WITH IT!  That's JUST WRONG!

Alexis: That's debatable, but it's also beside the point.  A central bank isn't a comic book superhero, dispensing two-fisted justice.  It's an institution with a specific role to play within a framework of other institutions.  It is settled EU policy that a feckless or insolvent government should not lead to a financial panic or an economic collapse.  And the ECB is responsible for carrying out that policy, not for reversing it.  

Viktor:  Worst central banker ever!

Alexis:  Time will tell

Note 1:

The ECB should carry out the tasks conferred on it with a view to ensuring the safety and soundness of credit institutions and the stability of the financial system of the Union as well as of individual participating Member States and the unity and integrity of the internal market, thereby ensuring also the protection of depositors and improving the functioning of the internal market, in accordance with the single rulebook for financial services in the Union. In particular the ECB should duly take into account the principles of equality and non-discrimination.  (EU 1024/2013 (30) emphasis added)

Note 2:

The stability of credit institutions is in many instances still closely linked to the Member State in which they are established. Doubts about the sustainability of public debt, economic growth prospects, and the viability of credit institutions have been creating negative, mutually reinforcing market trends. This may lead to risks to the viability of some credit institutions and to the stability of the financial system in the euro area and the Union as a whole, and may impose a heavy burden for already strained public finances of the Member States concerned.  (EU 1024/2013 (6) emphasis added)

Note 3:

 A single resolution fund (‘Fund’) is an essential element without which the SRM could not work properly. If the funding of resolution were to remain national in the longer term, the link between sovereigns and the banking sector would not be fully broken, and investors would continue to establish borrowing conditions according to the place of establishment of the banks rather than to their creditworthiness. The Fund should help to ensure a uniform administrative practice in the financing of resolution and to avoid the creation of obstacles for the exercise of fundamental freedoms or the distortion of competition in the internal market due to divergent national practices. The Fund should be financed by bank contributions raised at national level and should be pooled at Union level in accordance with an intergovernmental agreement on the transfer and progressive mutualisation of those contributions (the ‘Agreement’), thus increasing financial stability and limiting the link between the perceived fiscal position of individual Member States and the funding costs of banks and undertakings operating in those Member States. To further break that link, decisions taken within the SRM should not impinge on the fiscal responsibilities of the Member States. In that regard, only extraordinary public financial support should be considered to be an impingement on the budgetary sovereignty and fiscal responsibilities of the Member States. In particular, decisions that require the use of the Fund or of a deposit guarantee scheme should not be considered to impinge on the budgetary sovereignty or fiscal responsibilities of the Member States.  (EU 806/2014 (19) emphasis added)