Ultra Vires: The Eurozone Crisis and the European Central Bank’s Lost Independence

Ultra Vires: The Eurozone Crisis and the European Central Bank’s Lost Independence

Chris Land, MJIL Lead Articles Editor

Chris Land 3One of the greatest challenges facing the European Union today is democratic legitimacy.[i] As a compliment to nations’ republican apparatus, technocratic central banks like the European Central Bank (“ECB”) theoretically perform a crucial service. These banks support national economies as lenders of last resort[ii] — ensuring price stability[iii] and supervising the safety and soundness of financial institutions.[iv] In order to achieve these challenging objectives, our political structures typically grant them a measure of independence from the ordinary workings of government and plenary control over the currency union’s monetary supply.

The introduction of the European single currency in 2000, the euro, was intended to unite Europe’s diverse cultures and economies into a global economic powerhouse that could compete against the U.S. dollar as the world’s reserve currency.[v] In the first decade of the euro, however, the European Union largely ignored the institutional building blocks needed to balance key legal issues in the fledgling currency union. The protean events of the last seven years — the 2008 financial crisis and the sovereign debt woes of Portugal, Italy, Ireland, Greece, and Spain (lovingly referred to by the European media as “PIIGS”) — have fully exposed these structural flaws. In lieu of establishing a responsive economic decision-making structure that could continue to function under market stresses, the European Central Bank has evolved during this crisis into a body that is largely immune from accountability and has undertaken legally impermissible actions in order to defend the single currency.[vi]

On at least three occasions, the ECB intervened in the internal political processes of Italy, Greece, and Ireland to coerce these recalcitrant countries — at great domestic political and financial cost — into accepting rescue packages, i.e., a ‘bailout.’ In August 2011, ECB President Jean-Claude Trichet wrote a seemingly innocuous letter to Italian Prime Minister Silvio Berlusconi requesting that his government carry out a number of economic reforms, noting that while “[t]he Italian Government has decided to pursue a balanced budget in 2014 . . . these are important steps, but not sufficient,” stating also that labor market reforms were “essential.”[vii] Berlusconi was naturally cool to labor market reforms deregulating the hiring and firing of union employees as he was keenly aware that two Italian labor officials were assassinated for proposing similar reforms in the decade prior.[viii]

French President Nicholas Sarkozy and German Chancellor Angela Merkel later pressured Berlusconi to redouble his efforts, and tired of the pressure, Berlusconi took the unprecedented step of threatening to take Italy out of the euro.[ix] According to a former member of the ECB Executive Board, these horrifying remarks caused officials to withdraw support provided by the Bank on the bond markets (via the Securities Markets Programme) in an effort to persuade Prime Minister Berlusconi to quit.[x] Former U.S. Secretary of the Treasury Timothy Geithner also recounted that at a summit in the days before Berlusconi’s November 12, 2011 resignation that

a few European officials approached us [Sec. Geithner & President Obama] with a scheme to try to force Italian Prime Minister Silvio Berlusconi out of power . . . as helpful as it would have been to have better leadership in Europe, we couldn’t get involved in a scheme like that — we couldn’t have his blood on our hands.[xi]

Further east, Greece’s citizens were being asked to shoulder an enormous burden in 2011, ranging from sharp cuts in government services, unemployment near 25%,[xii] and years of economic austerity. Therefore, it was natural for Greece’s elected leadership to seek a political mandate from its citizens after the new bailout program and debt restructuring agreement was agreed to by Prime Minister George Papandreou in late October 2011, allowing the Greek people to have a say in the direction of their country, even if it was default.[xiii] Papandreou announced a referendum on the terms of the bailout on November 2nd.[xiv] “Speechless with rage,”[xv] ECB officials informed Papandreou that Greece would not receive additional funds until he resigned his office and allowed a new government led by a former ‘technocratic’ ECB official to take power five days later.[xvi]

Similarly, the year before, the Irish Government received a letter from the European Central Bank in November 2010, with an ‘explicit threat’[xvii] warning that the Bank would withdraw bond market support and other lines of credit—forcing immediate default—if Ireland proceeded with plans to write down bonds held by foreign creditors, instead of forcing Irish taxpayers to shoulder this burden. Former Bank of Ireland Governor Patrick Honohan stated that he was told in “‘categorical terms’ that ‘burning the bondholders’ would mean no [assistance] program, and, accordingly, could not be countenanced.”[xviii] Honohan was also careful to note that the demand was presented to him as a fait accompli, “which had apparently been taken at a very high-level teleconference to which no Irish representative was invited.”[xix]

These acts evidence the chilling truth that democratic values are not fully entrenched within the European constitutional structure today. Defenestration and threats of bankruptcy have shattered citizens’ faith in the motives European leaders in these countries, seemingly saying that their decisions are not important in times of stress when legitimacy is most needed. With proper democratic control, the European Central Bank would not have been able to take these actions. How likely are individuals to participate in the political process at both the national and European Union level if they believe that a disconnected elite only solicits their opinions for confirmation, and is all too ready to ignore their democratically ratified choices? This sentiment, combined with intractable economic challenges, represents a mortal threat to the euro that continues to stalk the continent today.

This post is an excerpt from the author’s forthcoming note on this topic in Volume 25, Issue 2 (spring 2016) of the Minnesota Journal of International Law.


[i] See, e.g., Lise Rye, Distant Voices: Ideas of Democracy and the Eurozone Crisis (2013); Paivi Leino & Janne Salminen, Should the Economic and Monetary Union Be Democratic After All? Some Reflections on the Current Crisis, 14 German L.J. 844 (2013).

[ii] Fed. Reserve Bd. of Governors, Roles & Responsibilities of Federal Reserve Directors 13 (2013).

[iii] Role of the Bundesbank, Deutsche Bundesbank, http://www.bundesbank.de/Redaktion/EN/Standardartikel/ Tasks/Financial_and_monetary_system/central_bank_tasks.html (last visited Mar. 30, 2015).

[iv] Bank for International Settlements, Issues in the Governance of Central Banks 33–37 (2009).

[v] See Benjamin J. Cohen, The Future of Reserve Currencies, Finance & Development, Sept. 2009, at 27, available at http://www.imf.org/external/pubs/ft/fandd/2009/09/pdf/cohen.pdf.

[vi] See Jacques Mistral, Uncomfortable Exits: A Tale of Two Lenders of Last Resort, in Think Tank 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy 32 (2013), available at http://www.brookings.edu/~/media/Research/Files/Reports/2013/08/g20-central-banks-monetary-policy/TT20-france_mistral.pdf?la=en; Paul De Grauwe, Why the ECB Refuses to Be a Lender of Last Resort, VoxEU, Nov. 28, 2011, http://www.voxeu.org/article/why-ecb-refuses-be-lender-last-resort.

[vii] Letter from the Eur. Cent. Bank to Silvio Berlusconi, Prime Minister of Italy, Aug. 5, 2011, available at http://www.corriere.it/economia/11_settembre_29/trichet_draghi_inglese_304a5f1e-ea59-11e0-ae06-4da866778017.shtml. See also Guy Dinmore & Ralph Atkins, ECB Letter Shows Pressure on Berlusconi, Financial Times, Sept. 29, 2011, 5:49 PM, http://www.ft.com/intl/cms/s/0/3576e9c2-eaad-11e0-aeca-00144feab49a.html.

[viii] Timothy Geithner, Stress Test: Reflections on Financial Crises (2014); Fraser Nelson, Europe’s Hit Squad, The Spectator Blog, Nov. 12, 2011, http://www.spectator.co.uk/features/7378428/europes-hit-squad/. See generally Alan Friedman, Italy: Monti’s Secret Summer, The Financial Times, Feb. 10, 2014, 6:54AM, http://www.ft.com/intl/cms/s/ 0/b9474c88-8e98-11e3-b6f1-00144feab7de.html#axzz2sqyEviuP.

[ix] Id. See also Italy: Umberto Bossi Urges Silvio Berlusconi to Quit, BBC News, Nov. 8, 2011, http://www.bbc.com/news/world-europe-15638773.

[x] Id.

[xi] See Geithner, supra note viii.

[xii] Greece Unemployment Rate, Trading Economics, http://www.tradingeconomics.com/greece/unemployment-rate (last visited Nov. 28, 2014).

[xiii] Many economists agreed that allowing Greece to default and regain competitiveness via devaluing a ‘New Drachma’ was preferable to remaining within the Euro. See Mark Weisbrot & Juan Antonio Montecino, More Pain, No Gain For Greece: Is the Euro Worth the Costs of Pro‐Cyclical Fiscal Policy and Internal Devaluation?, Ctr. for Econ. & Pol’y Res. (2012), available at http://www.cepr.net/documents/publications/ greece-2012-02.pdf.

[xiv] See Greek Cabinet Backs George Papandreou’s Referendum Plan, BBC News, Nov. 2, 2011, 3:57 AM EST, http://www.bbc.com/news/world-europe-15549352.

[xv] Ambrose Evans-Pritchard, Revenge of the Sovereign Nation, The Daily Telegraph, Nov. 1, 2011, http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100012986/revenge-of-the-sovereign-nation/.

[xvi] See Nelson, supra note viii.

[xvii] See Karl Whelan, The ECB’s Secret Letter to Ireland: Still Secret, Forbes, Nov. 29, 2013, 9:38AM,  http://www.forbes.com/sites/karlwhelan/2013/11/29/the-ecbs-secret-letter-to-ireland-still-secret/; Brendan Keenan, Revealed—Troika Threats to Bankrupt Ireland, The Irish Independent, Sept. 28, 2014, 2:30 AM, http://www.independent.ie/irish-news/politics/revealed-the-troika-threats-to-bankrupt-ireland-30621197.html.

[xviii] Keenan, supra note xvii. ‘Troika’ refers to the joint ECB-EU-IMF rescue plan.

[xix] Id.