The announcement that the ECB “unleashed a wall of money” to prop up ailing European banks has been greeted with general positive noises, and some confusion. The money is €489 billion in three-year loans, meant to inject liquidity into a tightened banking system, and to allow the banks to, among other things, buy up sovereign debt that the ECB won’t buy directly. The confusion arises from the relationship between the words and actions of Mario Draghi, the recently arrived president of the ECB. Draghi has been at pains to say that the ECB will not act as a lender of last resort, buying up sovereign debt that nobody else wants, without a major EU treaty-change that includes enforced austerity. As he said in an interview with the Financial Times ”We have to act within the Treaty. In general, there must be a system where the citizens will go back to trusting each other and where governments are trusted on fiscal discipline and structural reforms.” Yet, as any number of commentators have noted, providing this wall of money seems to be a kind of end-run around the treaty problem. Though it might not work in the long-run, it is taken by the likes of Paul Krugman as the admirable ‘subtlety‘ of eurocrats, finding solutions within the legal arrangements.
There is of course something positive about the head of an unelected, somewhat secretive, yet enormously powerful institution formally stating that he must follow existing law – the EU treaty in this case. Indeed such affirmation of the treaty is especially important given that many have called on Draghi simply to ignore the treaty and backstop the sovereign debt of southern European countries, or argued that it wouldn’t really violate the treaty. But there are deeper, more widespread political problems here, not least with Draghi’s own political game. If, in fact, Draghi and the ECB were merely playing the responsible Big Bank, keeping its head down and following the rules, and leaving the politics to the politicians, then that would be…something. But it is quite evidently not what Draghi has been doing.
The two-timing – saying one thing, and coming up with new, inventive ways of doing the other – illuminate something of a power game that the ECB is playing. Publicly, Draghi is holding back the ECB backstop under conditions – namely, judicially or politically enforceable limits on fiscal policy of European states, inscribed in a new treaty. That is a straight-up political demand, backed by the power that only the ECB possesses: the economic power to bail-out the southern states and European banks. It is a political demand, moreover, made upon already hurting European publics to endure not just a period of contraction, but a major restructuring of the relationship between their states and their economies. The idea behind the rewritten treaty, in other words, is not just to impose the pain of austerity measures, nor even to dismantle the welfare states, but to inscribe the logic of constraint and lowered expectations into the new supranational and by extension national political institutions.
Draghi, of course, is not the only political agent here – Merkel has led the charge for treaty-change with austerity written in. But her actions are unabashedly and professedly political, and understood to be so. Draghi’s statements and positions are taken to be somehow the words of an expert, nevermind the ‘subtle’ coercions of offering a continental bailout only on strict terms. Draghi’s views are supposed to be the limited advice of an economic expert, and one who in some sense a neutral actor, outside and above politics – like the institution he runs. What makes the political ploy here worse is the power that backs it. As noted, the ECB is the only one with the potential to offer a bailout, or at least commit to printing enough money to buy up debt, which might calm the bond markets and save the banking system. In certain ways, then, Draghi is not just more German than the Germans, but has a power they don’t have.
Of course, the two-timing – such as the wall of money – reflects the fact that the ECB is not all powerful. Or at least, that it is not so flush with power resources that it can wait out this game of financial chicken longer than those unwilling to make the sacrifices Draghi demands. After all, waiting too long makes backstopping a whole lot more expensive, risky and potentially less effective – no doubt one reason Draghi felt compelled to engage in this recent refinancing operation. But it has to be said that Draghi is playing a political game, one that favors certain interests over others, with potentially far-reaching consequences depending on the ultimate political and legal changes.
Of course, as mentioned, the point is not that Draghi is some all powerful financial witch-doctor, who can wave his magic wand – or not – and get the world to do his bidding. In fact, the other striking feature of the debate around ECB actions is the way in which it speaks to the restoration of a certain status quo ex ante. Although the financial crisis of 2008, and its potential sequel in Europe, produced numerous arguments that mainstream economics had been discredited, and that a “new economic paradigm” was needed, what is striking is just how little has changed. Before the crisis, the dominant view was that a period of Great Moderation had been achieved, largely thanks to the machinations of expert central bankers who fiddled with interest rates. One of the background assumptions of this view was that monetary, rather than fiscal, policy was a finer instrument of economic engineering, not least because ‘less political’ and thus less prone to the messy distortions of democratic politics. Central bankers were gods, or at least master governors, to be appreciated and listened to (despite their continued interest in things like wage suppression). Little moves with interest rates were guessed at and awaited; the public divined, parsed, and poured over statements by the likes of Greenspan a bit like Kremlinologists looking for the relevant post-Cold War obtuse institution of power. Everybody knew that their economic fate was largely out of their hands, but thankfully in trusted hands.
Now we are supposedly on the other end of that paradigm, yet caught in the Sturm und Draghi of another bewildering central bank’s enigmatic words and actions. It is hard to accept how it is that so little could change. Or worse yet, how much the old pattern in certain ways has become even more entrenched. The most significant economic decisions are placed in the hands of undemocratic figures, even when this means toppling national governments (Italy, Greece) to replace them with technocrats. And the dominant common sense is in favor of austerity, rather than rational, democratic control of the economy. The dead-weight of ideological conformity and (hopefully changing) public passivity is what stands out most strongly. At the end of the day, the power of a figure like Draghi is a back-handed reflection of the relative absence, or at least weakness, of alternatives. The truth in the conspiracies about bankers manipulating everything is so much that central bankers favor certain interests but dress up their policies as the public interest (which they certainly do). Conspiracies are a distorted registration of the weakness of the Left, a distortion dangerous because it replaces the political weakness of a potential movement with the comforting illusion that power is beyond anyone’s reach in the first place. Draghi and his ilk should be put in their place and own up to the political game that they play. But they won’t do it voluntarily, and it will take another kind of politics to expand rather than shrink the horizon of economic possibility.