THE European Central Bank (ECB) has fired its magic bullet. By promising "unlimited" purchases of sovereign bonds, ECB president Mario Draghi may have kept his pledge to do "whatever it takes" to save the euro. But in rescuing the currency, Draghi’s magic bullet has badly wounded something even more important — democracy in Europe.
As a result of the ECB’s actions, voters from Germany to Spain will increasingly find that crucial decisions about national economic policy can no longer be changed at the ballot box. In Germany, in particular, there is a growing realisation that the ECB, an unelected body that prides itself on its independence from government, has just taken a decision that has profound implications for German taxpayers — but one they cannot challenge or change.
Previous European bail-outs had to be approved by the German parliament and were subject to review by the German courts. Indeed, the German supreme court will rule on the constitutionality of the most recent bail-out tomorrow. But the ECB’s decision to accept unlimited bond purchases is immune to such democratic controls. The bank cannot be overruled by the German parliament. And because it is a European Union institution, it cannot be checked by the German courts, only by the European Court of Justice.
At the ECB, the president of the German central bank has just one vote — the same as the presidents of the central banks of Malta or Slovenia. Jens Weidmann, the head of the Bundesbank, cast the sole vote against the bond-buying plans. German Chancellor Angela Merkel may well have given tacit consent to the ECB’s actions and one German member of the ECB council voted with the majority. But opinion polls and media comment suggest Weidmann’s position reflects majority opinion in Germany.
After the ECB decision, the Bundesbank issued a statement arguing that the ECB’s plans are "tantamount to financing government by printing banknotes" and "redistribute considerable risks among various countries’ taxpayers". Translation: the ECB’s action are illegal and dangerous, and German taxpayers could end up with the bill.
Of course, the Germans have always revered central bank independence. Under normal circumstances, it is a fine tradition. But in the euro crisis, the ECB is suddenly behaving in a way that veers wildly from the Germanic view of prudent central banking.
It is not just Germans who have reason to feel nervous about the democratic implications of what the ECB has done. To access the ECB’s unlimited firepower, the Spanish or Italians would have to agree to "enter a programme", which sounds unpleasantly like the kind of condition that is laid down for a wayward drug addict. In reality, Madrid or Rome would have to accept International Monetary Fund-style supervision of their national budgets, directed from Brussels and Frankfurt. Such a humiliating and overt loss of national sovereignty, combined with a deep recession, would be the perfect formula to drive voters to the political extremes, as Greece is demonstrating.
Of course, European idealists would argue that talk of a loss of national sovereignty is outmoded. The euro is a pan-European currency so its fate should be decided by European voters and institutions, not by individual nations. In practice, however, the eurozone crisis is increasingly polarising European politics along national lines. In Italy and Spain, there is now something close to a national position — uniting leftist and right-wing parties — against what are regarded as arrogant and self-centred German policies. In Germany, however, there is a left-right consensus that austerity in southern Europe must be the price of bail-outs.
So why has Draghi done it? The answer is that he faced a truly hideous dilemma. It was clear that the hundreds of billions of euros committed to European bail-out funds have not been enough to ward off the threat of collapsing banks and sovereign defaults across the eurozone. A financial calamity could lead to another depression, followed by political radicalisation and a threat to democracy that is much more direct and unsubtle than the menace posed by the ECB.
By contrast, if Spanish and Italian borrowing costs come back under control — and their governments are prodded into making important structural economic reforms — then the ECB’s actions last week could yet be vindicated. Draghi would not only have saved the euro, he would have bought Europe the time it needs to return to growth.
However, a great many things now have to go right simultaneously for Draghi’s plan to work. It is rather more likely that political and economic unhappiness will grow in Europe over the next year as Germany slips into recession and Italy and Spain (not to speak of Greece) struggle with ever deeper austerity. If the euro were ever to break up, the direct financial cost to Germany and other creditor nations could also be much higher, because of the ECB’s bond-buying programme.
Certainly, for anyone with a sense of history, the sight of the German representative on the ECB being isolated and outvoted should be chilling. Since 1945, the central idea of the European project was never again to leave a powerful and aggrieved Germany isolated at the centre of Europe. We are now dangerously close to that point.
© 2012 The Financial Times Limited