European Affairs

Visiting Washington in February, the Secretary General of the Parliament Klaus Welle underscored the dimensions of the sea-change  taking place in the EU institutional power equation. The banking union was “a decision of a magnitude that cannot be estimated high enough,” he said, speaking at Johns Hopkins University’s Center for Transatlantic Relations. Welle noted how the ECB’s role had “fundamentally changed” in recent years to become a “lender of last resort” with powers almost on a par with the U.S. Federal Reserve.   Increases in EU institutions’ powers usually occur through Treaty changes, but this was not necessary with the ECB as most of its powers now on display were established in its founding charter.

When the euro was set up in 1999, the ECB functioned mainly as the guardian of interest rates and their periodic adjustment.   The ECB’s goal was to keep inflation at around 2%.    Some thought this rendered the bank short-sighted for  being more concerned about inflation than growth.  growth. Also at issue was  how free the ECB should be from political control, with Germany arguing it should be completely independent, while France felt it should be more subject to political strictures.

In 2002,  to the surprise of some and relief of many,  the replacement of national currencies by euro notes and coins, in the twelve countries that adopted the euro proceeded  smoothly.  In the following years, Eurozone members on Europe’s periphery  like Spain and Ireland enjoyed robust economic growth due in part to the lower borrowing costs they enjoyed due to Eurozone membership. Big exporting nations like Germany benefited too because the costs their exporters incurred due to fluctuating currency exchange rates were greatly reduced.

But this positive picture changed dramatically after the recession of 2009.     Eurozone members sank deeper into debt as their economies contracted,   and they spent large sums on economic stimulus packages and bank bailouts.  In 2010,  interest rates on sovereign bonds soared because markets feared  that countries like Greece and Portugal would default on debts.    The ECB acted with alacrity  to buy up much of this debt to reassure  markets the euro would not crumble.  With Europe’s banking sector also in trouble,  the ECB came to the rescue again. In late 2011 and early 2012, the ECB set up a series of Long Term Refinancing Operations - essentially low-interest loans to the tune of  €1 trillion. 

In addition, the ECB saw its role in setting economic policy expanded because of the EU-International Monetary Fund (IMF) bailouts of Greece, Ireland and Portugal of 2010 and 2011. Alongside the Commission and IMF, the ECB holds one of the three seats in the so-called Troika, which pushes the three bailout nations to take unpopular austerity measures like cutting public sector jobs and pensions.

In early 2013,  as the Parliament and Council negotiate the banking union proposals, the spotlight is shining on the ECB once more. Parliament is somewhat alarmed by the meteoric rise of the ECB,  as the Parliament has  almost no supervisory authority over it. In fact, Parliament is only consulted, with authority only to give a non-binding recommendation, on the EU Law  that will put the ECB in charge of supervising the banks.   EU member states must grant, however, unanimous approval  prior to enactment, targeted for March 2014.   

Meanwhile, an even newer institutional player, the European Banking Authority (EBA), has entered stage-left. Established in 2010 in response to the financial crisis, the EBA does stress tests on banks to assess   if they have sufficient assets to cover liabilities in case of a sudden shock in the economy. Parliament has legislative powers to determine the EBA’s mandate, which extends not only to the 17 Eurozone nations but to the full EU-27. EU lawmakers are trying to figure out a clear division of labor between the ECB, the EBA and the national banking authorities.

While one can easily get bogged down in the minutiae of the inter-institutional wrangling, one should not lose sight of the big picture.   We are seeing the biggest shift in the EU’s institutional architecture since the 2007 Lisbon Treaty.  While the European Council and Parliament were the big winners with Lisbon, the euro crisis is thrusting the ECB to claim a place in the sun.