The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 30.6.2011). One set of papers (including one by me) discusses the prospects for monetary policy in light of the wide variations in the economic cycle across different Euro area economies. The other set of papers discuss issues related to restructuring Greek debt.
I’ll repeat my final couple of paragraphs here. These were written prior to the comments discussed here
The relationship between the ECB and the peripheral economies has become extremely complex. However, it is clear that ECB officials have regularly used the implicit threat that they can withdraw their support for peripheral banking systems, or else continue to provide funds to “persistent bidders” at interest rates that are perhaps considerably higher than are charged to other countries, as a way to obtain actions they deem necessary.
In relation to Greece, ECB officials have been using the threat of the withdrawal of the eligibility of Greek sovereign debt as collateral for open market operations to put forward their argument against any debt restructuring. In the case of Ireland, it is known that Irish government officials have requested that assurances be provided that the ECB will continue to provide sufficient liquidity to Irish banks over the next few years, perhaps via a special medium-term facility. However, no such assurances have been provided. And without greater clarity on the timeframe for repaying their loans to the ECB, it will remain impossible for even recapitalised Irish banks to obtain market funding.
The ECB’s strategy of threatening peripheral banking systems (and the regular coverage this receives in the media) has become one of the destabilising factors that have contributed to worsening the current crisis. It is time for this poorly-thought-out strategy to cease. The ECB’s obligations under the European Treaty mean that it cannot help peripheral countries via keeping interest rates low for the next few years. But it can continue to act as a lender of last resort to the banks in these countries in a way that reassures (rather than worries) financial markets.
To my mind, the latest “anonymous ECB official” comments represent a new lowpoint for that particular institution.