Though little remarked on, there is a very striking difference between the ruthless approach adopted by the European Central Bank (ECB) to indebted sovereign States compared to its treatment of banks. When Portuguese banks declared they would not any longer purchase bonds if Lisbon did not seek a bailout, the Prime Minister was forced to succumb, only to be told a week later that the banks had had ‘clear instructions’ from the ECB to turn off the tap.
In other words, the ECB in effect brought down the Portuguese government. When the ECB stepped in with a massive bond-buying programme when yields in Italy reached dangerously high levels, it made clear the price: still further austerity and labour market de-regulation.
The ECB, unelected and unaccountable, was now directing Italian fiscal and labour policy – even Berlusconi was moved to comment that ‘They made us look like an occupied government’. When Papandreou, the Greek Prime Minister, announced he would hold a referendum before his government could agree to a second bailout, the leaders of Germany and France together with the ECB chief forced him out. He was replaced by the unelected technocrat, Lucan Papademous, former ECB vice-president.
All this contrasts very sharply with the ECB’s soft and accommodating approach to the banks. It has regularly stepped into the breach to support the banking sector with continuous rafts of cheap loans which effectively keep zombie banks on life support. Since 2007 ECB lending to Eurozone credit institutions has more than tripled from €400bn to €1.2 trillions.
The ECB balance sheet has doubled to more than 30% of Eurozone GDP. By continuing to accept the banks’ non-marketable collateral, the ECB has allowed them to exchange the bad investments they made in the boom years for the highest quality form of funding – central bank reserve money.
All this raises an important political question: why should a public institution keep a banking industry so fragile and with such a dubious social contribution running in its present form? What really needs to be done is to shrink and simplify it and return banking to a utility function.
But these more radical reforms are being blocked by the ECB’s feather-bedding the financial sector with its misplaced welfare programme. The effect is that the banks exhibit the worst stereotype of welfare dependency dreamt up by the Right-wing press, and go from scandal to scandal exploiting the moral hazard that they are too big to fail.
The consequence of this abdication of government responsibility is that is that more and more economic decision-making is now moving beyond democratice control.