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Sunday, June 9, 2013

Should the ECB Spend an Unlimited Amount on Bonds?

The European Central Bank did not place any limit on its program in which the bank purchases bonds of heavily indebted states so as to keep their borrowing costs (i.e., the bonds’ interest rates) from increasing. The program, called Outright Monetary Transactions, had already accomplished that even before spending a euro. Anticipation that the ECB would enter a state bond market if its interest rate rose high enough was enough to keep the rates from skyrocketing.  So, the announcement that the ECB would spend what “would be adequate to meet [the] objectives” is perhaps more important than how much the central bank actually spends.[1]  According to Joerg Asmussen, an executive board member of the ECB, the OMT was “economically necessary, legally permissible and effective.”[2]  He made the comment as a court in the state of Germany was preparing to consider whether the OMT “infringes on the constitution’s insistence on sovereign parliamentary control over budget matters.”[3]  Hence, a tension between “legally permissible” and “infringes on . . . sovereign parliamentary control” threatened to kill a program that had already succeeded before buying one bond. Fortunately, legal experts were saying that the German court might defer to the European Court of Justice, the E.U.’s supreme court.

Analysis:

Is spending by a central bank included in “budget matters?” The E.U. has its own budget, distinct from those of the state governments.  OMT is not included in the federal budget, just like the Federal Reserves “creation of money” to bail out banks is not contained in the U.S. Government budget. The question is therefore whether OMT exceeds the authority of the ECB. On that matter, analysis by a specialist would be needed.
In terms of “sovereign parliamentary control,” the wording alone hints of denial that the states had already ceded a significant amount of fiscal governmental sovereignty to the E.U. and the ECB. To say that in respect to “budget matters,” Germany is a sovereign state is simply not true. The question, which is not unheard of in federalism, is whether the actual division of sovereignty corresponds to the federal basic, or constitutional, law. In other words, the tension itself suggests that the E.U. is a federal system.
In addition to the tension within federalism itself, Europeans, and Americans too, could do worse than consider the danger in a central bank being able to create an unlimited amount of money to spend on a program. Besides the risk of inflation, the lack of limitation implies a lack of balance in the financial and governmental systems. In the words of Gregory Bateson in his Steps to an Ecology of Mind, when an unlimited, or schizogenic, variable exists within a system that is homeostatic, or in a steady state, that system itself can be “pierced” by the expanding variable and the equilibrium broken. As one example, the unlimited growth of a species, such as the human species, can shatter the equilibrium of the Earth’s climate. Unlimited spending by either the ECB or the Federal Reserve is in theory if not in practice dangerous to the E.U. and U.S., respectively. Particularly in fiscal matters, balance rather than hypertrophy is highly valuable even if self-restraint is difficult for human nature to sustain, let alone accomplish.


[1] Reuter, “ECB Says Bond-Buying Program Is Unlimited,” The New York Times, June 9, 2013.
[2] Reuter, “ECB Says Bond-Buying Program Is Unlimited,” The New York Times, June 9, 2013.
[3] Reuter, “ECB Says Bond-Buying Program Is Unlimited,” The New York Times, June 9, 2013.