We told you so. Ireland and the ECB edition.
From the Peterson Institute the executive summary of a report written by Ajai Chopra.
The incompleteness of the euro area’s institutional design, especially the absence of a
banking and fiscal union, has propelled the ECB’s role in the design and implementation
of EU-IMF programs for euro area countries. This role gives the ECB great power and
influence but also generates controversy and resentment in these program countries.
In a gratuitous November 2010 letter to the Irish Finance Minister, the ECB threatened
to cut off liquidity support for Irish banks unless the government agreed to a financial
assistance program with the EU and IMF. The letter also made demands in the areas of
fiscal austerity and structural reform that were not only beyond the ECB’s remit but
were also wrong for Ireland’s circumstances.
The ECB opposed imposing losses on Irish banks’ senior bond holders and made it clear
that it would not support a program that included this feature. Even if the ECB believed
that spillover risks dominated at the time, why should Irish taxpayers bear a
disproportionate burden to address wider euro area concerns? Furthermore, why was
the ECB unwilling to consider forceful liquidity support for euro area banks at the time
to mitigate potential contagion in bank funding markets?
The ECB initially pressed for swift deleveraging of Ireland’s banking sector through
front-loaded and large-scale asset sales to reduce quickly in its large exposure to
Ireland. In doing so, it put protection of its own balance sheet before the cost to the
Irish taxpayer. Later the ECB accepted that fire sales of assets would be
counterproductive, but by then trust in the institution and its legitimacy had been
Even though ECB liquidity support for the Irish banking system was a critical
component of the program, the ECB was unwilling to make an ex ante commitment on
this front. More vocal public support by the ECB from an early stage would have
inspired greater confidence and would have likely reduced the required amount of
Looking beyond the Ireland program, the ECB’s monetary policy has been much too
tight since the start of the crisis in 2008. This has damaged the economic recovery not
only of crisis countries but the entire euro area. Countries’ debt burdens are harder to
bear because low inflation moderates nominal income while leaving debts untouched.
The ECB’s asymmetric view of its inflation target makes it important have a debate
about the appropriate definition of price stability to guide a more pro-active monetary
policy. For example, an explicitly symmetric inflation target of 2 percent should be
The ECB threatened to cut off emergency liquidity assistance (ELA) in Ireland and
Cyprus, but in Greece it actually did so. The discretion exercised by the ECB in the
provision of ELA has made it more of a political actor instead of an independent
technocratic institution. An overhaul of procedures for granting ELA with the aim of
increasing transparency and accountability should be a high priority. As the ECB is now
the single supervisor for large euro area banks, ELA should no longer be provided via
national central banks and instead should be fully in the hands of the ECB.
The ECB is the central bank and bank supervisor of each euro area country and the
entire euro area. It should therefore not be a part of the troika where it sits across the
table from country authorities and negotiates and monitors financial assistance
programs. The ECB belongs on the country’s side of the table.