The European Central Bank improperly veered into political activity during the eurozone crisis and should withdraw from the “troika” of international bailout monitors, according to anti-corruption watchdog Transparency International.
In a major review of the central bank’s actions, carried out in cooperation with ECB officials, the report found the central bank had been pushed “breaking point” as it rapidly developed into a “dominant force in European economic governance” during the bank bailouts and emergency monetary policy measures it has carried out over the last seven years.
“The ECB’s accountability framework is not appropriate for the far-reaching political decisions taken by the Governing Council”, said the report, authored by Benjamin Braun, an economist at Harvard University.
As part of its recommendations, Transparency International urged the ECB to no longer form part of the “Troika” of creditors with the EU Commission and International Monetary Fund during further bailouts and make public all its decisions and opinions.
The warnings come as the ECB has assumed greater power to regulate eurozone banks in recent years and as EU authorities prepare to “bail in” Italy’s oldest bank Monte dei Paschi this year. The ECB is also still part of the lenders involved in Greece’s third international bailout.
Under EU treaty law, the ECB has a narrow but strict mandate to ensure “price stability”, which has been interpreted as an inflation target of just under 2 per cent.
However, Transparency International warned this sacrosanct independence had afforded the ECB “an extraordinary degree of latitude” to make significant decisions during the eurozone crisis which first engulfed Ireland, Portugal and Greece in 2010 before spreading to Spain and Cyprus in the years that followed.
These included “secret” letters sent from the bank to the governments of Spain and Italy which made clear that ECB bond-buying was conditional on economic reform efforts and a decision to remove ordinary funding for Greek banks following the election of the Syriza government in early 2015.
Such episodes highlighted the “severe strain on the institutional arrangement that underpins the ECB’s partial exemption from the principle of democratic accountability” said the report.
This powerful role, where the ECB has pressured governments and financial systems risked repeating itself “in the upcoming negotiations with Greece, and with the current recapitalisation of Italian lender Monte dei Paschi di Siena, which threaten the euro zone’s current fragile stability,” added the report.
Italy’s government has already lashed out at the ECB’s role in the MpS rescue after the central bank’s supervisory arm hiked the lender’s projected capital black hole from €5bn to €8.8bn late last year.
The ECB was forced to make public the diaries of its governing council members after its top central bankers came under fire for meeting bankers and asset managers hours before major policy decisions. The decision was commended by TI.
Its role in banking bailouts has also been questioned. In 2015, former ECB president Jean-Claude Trichet appeared before a parliamentary committee in Ireland, where he denied ordering the government to bailout its financial system at all costs.
As part of its third bailout, Greece’s current government has urged the ECB to include the country in its eurozone-wide quantitative easing measures to help ease the strain on the economy. But the central bank has said it will not take on the risk of buying Greek bonds before it has assurances about the sustainability of its debt.
To avoid “mission creep” and further political interference, the report urged the ECB to first gain the assent of the president of the eurozone’s finance ministers and the European Parliament before it makes any demands on governments in exchange for its financial support.
ECB president Mario Draghi welcomed Transparency International’s recommendations but added that some of the recommendations would fall outside of the institution’s mandate and its obligations as set out in the eurozone’s treaties.
“It is the duty of European institutions to further strengthen their legitimacy both by reinforcing their democratic accountability and by showing that they meet the objectives they’ve been entrusted with,” said Mr Draghi.