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Mario Draghi, ECB President. Wikipedia

ECB monetary policy is to serve two masters

The monetary policy of the ECB is to serve two masters. One is a monetary mandate to ensure price stability, and on July 26, 2012, a second one was added. On that day, the then President of the ECB, Mario Draghi, announced the cohesion of the Eurozone at any price.

Published: November 3, 2019, 8:56 am

    “Whatever it takes,” was his words which has since made history. And according to Draghi, the second one “will be enough”.

    But everyone knew that they would not get rid of bonds from over-indebted euro states as quickly as Draghi printed money to buy them. The Federal Constitutional Court has classified this project as an “ultra vires act”, meaning a decision that goes beyond the actual mandate of the ECB.

    By contrast, the European Court of Justice (ECJ) has considered the ECB’s activity compatible with the European Treaties.

    Banks, insurance companies and other investors have relied on Mario Draghi’s comprehensive guarantee and bought government bonds. Interest rate differentials or spreads, between German government bonds and high-risk bonds were almost completely leveled off. Their prices rose accordingly and brought the buyers massive “windfall profits”.

    Draghi launched a government bond purchase programme for a total of $2,6 trillion in early 2015, pushing government bond rates below zero in the eurozone. The official reading of this policy was to ward off a threat of deflation.

    The actual goal was to give some over-indebted euro countries access to ultra-cheap money. Draghi’s last act was the resumption of €20 billion in government bond purchases per month and raising ECB negative interest rates to 0,5% on bank deposits, forcing banks to increase lending. The members of the ECB Governing Council from the stability-oriented countries did not see any sense in this action and did not agree with the package.

    Professional observers of the monetary scenario expect Christine Lagarde, the recently elected ECB president, to “reconcile” the various factions in the central bank council. But what is there to reconcile, if some people want the return of the ECB to their actual mandate, but others do not want to maintain access to the ultra-cheap money? The ECB clearly can not serve two masters.

    The French President, Emmanuel Macron, has thwarted the election of Jens Weidmann as President of the ECB, so that his candidate, Christine Lagarde, can continue its political course.

    This policy not only targets German citizens and undermines their pensions, but also that of the French, Dutch and citizens of other nations which suffer as a result. In the long run, the injured parties will not let this happen since eurocritical parties will start to revolt.

    The German Federal Government will not put any obstacles in the way of the ECB President, says Professor Joachim Starbatty, an economist and former member of the European Parliament.

    “Consequently, the lawyers of the Federal Government before the Federal Constitutional Court and the ECJ are on the side of the ECB. This will remain so. This is also supported by the forthcoming staff decision in the ECB,” he pointed out.

    An euro that is undervalued for Germany, boosts German exports and keeps employment high, is at the same time overvalued for southern peripheral Member States whose exports are dampened and therefore they struggle with low incomes and unemployment highs.

    The German Federal Government will therefore not lift a finger for the return of the ECB to monetary policy normality but will be betting on Macron to keep his compatriots from revolting to secure their retirement.

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