European Affairs

Perspectives: No Blank ECB Check for Greece     Print Email
By Alexander Privitera, Director Business & Economics at AICGS

alexanderpriviteraThe new Greek political leadership is learning how painful it is to transition from a populist political campaign platform to the actual job of governing a country in the euro area. Only days after promising voters a clean break with the recent past, the illusion that Greece could regain full sovereignty within the monetary union is already being replaced by a well-known pattern of jockeying for a better negotiating position. For the moment, Alexis Tsipras, the new prime minister, does not appear to have a coherent plan.

All this was to be expected given the harsh tones and contradictory promises of the campaign. But the biggest miscalculation that the new government in Athens seems to have made is to fundamentally misjudge the role of the European Central Bank (ECB). Not only did Tsipras ask for the end of the intrusive role of the troika—the body made up of the ECB, the International Monetary Fund (IMF), and the European Commission (EC)—in overseeing his country’s fiscal and economic policies, he also asked to write down part of the Greek debt holdings of the ECB. Such a step would amount to monetizing Greek debt and is explicitly prohibited by European treaties. In fact, writing down the central bank’s sovereign debt holdings would undermine the legal and political underpinnings of the monetary union. Saving Greece in such a fashion would mean destroying the euro. No wonder the ECB had to make it clear to the newly elected Greek leaders that it has no intention of playing ball.

The new government in Athens expected flexibility from the ECB’s president Mario Draghi because of his promise to “do whatever it takes” to save the euro. In that case, Tsipras and his finance minister Yanis Varoufakis probably failed to understand that the ECB would only do so “within its mandate.”

Perhaps Tsipras interpreted the recent decision made by the ECB to launch a vastly expanded program of asset purchases, the euro zone’s own version of QE (quantitative easing), as a sign that the central bank has finally decided to ignore the orthodox German approach to the crisis. If that was the case, Tsipras experienced a rude awakening. Last week the ECB’s governing council decided that Greek government debt was no longer eligible as collateral for the central bank’s cheap liquidity. The decision was “based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing Eurosystem rules.” Greek banks can still tap emergency liquidity, but this has now become more expensive.

Tsipras should have listened to the ECB president more carefully in recent weeks. Draghi made clear that given the junk status of Greek sovereign debt, without an internationally agreed bailout program, there could be no more money.

By deciding to tighten the funding for Greek banks, the ECB clarified to the new Greek leadership that the central bank has no intention of ignoring some very basic rules. The ECB tossed the ball squarely back where it belongs, into the politicians’ court.

In only a few weeks, this is the second time that Draghi forcefully reasserts the independence of his institution from European politicians. On January 22, he decided to launch QE despite the stiff opposition of the German chancellor. And now Draghi has signaled to Greece and its creditors that it is first and foremost they who need to find an agreement.

The two decisions are intertwined, since the informal partnership between Draghi and Merkel suffered as a consequence of the recent monetary policy decision. It was in fact naïve to expect the ECB to openly challenge Germany once again. Since Merkel and many Germans are deeply convinced that QE eases the political pressure on stressed countries to enact structural reforms, any central bank’s softness toward Greece would only confirm those views and embolden anti-euro political forces within Germany.

Indeed, it makes no sense to do whatever it takes to keep Greece in the euro zone if the price to pay is an estranged Germany, isolated within the monetary union. At the same time, Germany needs to recognize that it is dangerous to feed the perception among a growing number of Europeans that their institutions have become their enemy.

For now the ECB will stay on the sidelines, focus on the challenge of implementing QE successfully, and try to support the fragile economic recovery. More growth across the euro zone would do much to undermine euro skepticism. Early signs are mildly encouraging. The recent decline in oil prices and the weakness of the euro are contributing to help the recovery, especially in export-oriented economies, such as Germany but also Italy. As a consequence, the European Commission has revised its economic growth forecasts upward for 2015, from 1.1 percent to now 1.3 percent and expects more robust economic activity in 2016. Any additional growth would help to reduce the potential for a political and economic spillover of the Greek problem into other member states.

However, whether politicians will be capable of averting a worsening of the Greek crisis without help from the ECB remains to be seen. They could be tempted to take time and wait for the central bank to act, even in the absence of a political deal. It would be a grave mistake. Ultimately, this is a test that will prove if Europe’s political leadership has learned from past mistakes. Simply continuing to muddle through will neither help Greek citizens nor their euro zone partners. It would only contribute to solidify the sense of hopelessness that now grips so many Europeans.

*Alexander Privitera is Director Business and Economics Program and Senior Fellow at the American Institute for Contemporary German Studies (AICGS) at Johns Hopkins University and a member of the Board of Advisors of European Affairs.