ECB operations are like the wild west and beyond democratic legitimacy

I read a very interesting study by two Dutch academics last week – The ECB, the courts and the issue of democratic legitimacy after Weiss – which will be published in the Common Market Law Review (Vol 57, No 6, 2020). It examines the way in which the ECB operations and policy interventions have gone way beyond their original conception in the Maastricht Treaty and now conflict with democratic accountability. While the authors propose ways to address the democratic deficit, I am sceptical. Essentially, there needs to be a fundamental change in the Treaty and the establishment of a federal fiscal capacity embedded into a genuine European government. But then pigs might fly!

The Background

The paper by Nik de Boer and Jens van ‘t Klooster reflects on the recent court cases pertaining to challenges to the ECB’s – Public Sector Purchase Programme (PSPP) – which according to the – latest data – (October 2020) has seen the ECB accumulate €39.7 billion worth of government bonds.

The PSPP is a component of the overall Asset Purchase Programme (APP) conducted by the ECB.

Note, this is a separate program from the – Pandemic Emergency Purchase Programme (PEPP) – which just amplifies the massive holdings of government bonds by the ECB.

By November 20, 2020, the ECB had bought €680,894 million under the PEPP.

The PSPP was challenged by several groups in the Bundesverfassungsgericht (Federal Constitutional Court, Germany) on the grounds that it was violating the terms of the Treaties (bailout rules) and that the German government had failed to oversee the participation of the Deutsche Bundesbank in the ECB’s programs.

The challenges essentially claimed that the ECB was moving outside of its legal mandate and engaging in “monetary financing”.

This conduct infringed the basic democratic principles embedded in the German constitution (Basic Law) and thus undermined the German constitutional status.

The Bundesverfassungsgericht determined in 2018 that (Source):

… if the PSPP programme exceeds the mandate of the ECB or infringes the prohibition of monetary financing, it must uphold those various actions. The same applies if the rules on the sharing of losses arising under that programme affect the budgetary responsibility of the Federal Parliament.

As a result, it pushed the matter to the European Court of Justice (ECJ) to interpret the “validity of the PSPP programme in the light of EU law”. The ECJ is the court that upholds the legal structure of the EU.

On December 11, 2018, the ECJ found that the PSPP:

… does not infringe EU law … It does not exceed the ECB’s mandate and does not contravene the prohibition of monetary financing

It claimed that the PSPP fell “within the area of monetary policy … and observes the principle of proportionality”.

They found that the PSPP was intended to push inflation up to the 2 per cent ECB definition of price stability.

Regular readers will know that the inference that purchasing government bonds with bank reserves would drive up inflation is a reflection of the belief in flawed mainstream quantity theory of money and the money multiplier.

It was never going to drive up inflation and the ECB has systematically failed to maintain price stability according to its own definition.

But that is an aside to today’s blog post.

I considered the ECB’s continuing failure in this regard in these blog posts (most recently):

1. Eurozone inflation heading negative as the PEPP buys up big – don’t ask the mainstream to explain (June 4, 2020).

2. ECB confirms monetary policy has run its course – Part 1 (September 17, 2019).

3. ECB confirms monetary policy has run its course – Part 2 (September 18, 2019).

You can read the ECJs judgement in full – HERE.

So then the matter went back to the Bundesverfassungsgericht, which determined in its – May 5, 2020 Ruling – that the Court of Justice of the European Union had “exceeded its judicial mandate” in determining that the ECBs asset purchase program (PSPP) was within the legal limits of the Treaties.

The ruling said that:

… the Federal Government and the German Bundestag violated the complainants’ rights under Art. 38(1) first sentence in conjunction with Art. 20(1) and (2), and Art. 79(3) of the Basic Law (Grundgesetz – GG) by failing to take steps challenging that the ECB, in its decisions on the adoption and implementation of the PSPP, neither assessed nor substantiated that the measures provided for in these decisions satisfy the principle of proportionality.

Proportionality is a ‘principle’ built into the TEU (Articles 5(1) and 5(4)) which relate to the “division of competencies between the European Union and the Member States”.

In this case, the intent of the ruling was to question whether the ECB’s behaviour was commensurate with its stated monetary policy objectives.

It is clear that the Treaties never considered the ECB would play a major fiscal policy role, which in the climate of austerity imposed by the Commission on Member States, became essential if the common currency was to survive.

On the one hand, it has made it impossible for Member States to maintain high levels of prosperity. Member States move between various degrees of crisis as they try to stay within the ‘unworkable’ fiscal rules.

On the other hand, the ECB, which was entrusted with monetary policy, has been forced by the austerity bias to become a sort of de facto fiscal agent, which the Treaties claim (via subsidiarity etc) is the sole domain of the Member States.

This is what the BVerfG is ruling against.

I considered that decision in this blog post – BVerfG decision once again exposes the sham of the Euro system (May 6, 2020) – and the title indicates what I thought about it.

There have been all sorts of compromises proposed to deal with the fall out of the decision, particularly in relation to the conduct of the Bundesbank. But that is not the topic today.

The issue of democratic legitimacy

The Dutch academic paper asked the question:

Why did both courts come to such different answers?

They argued that “the fundamental issue of legitimacy at stake is of a kind that courts by their nature are ill-equipped to address.”

Their conjecture is that:

1. The ECB was mandated by the Maastricht Treaty to maintain price stability at a time when the “monetarist paradigm” dictated that a narrow, rules-based approach to a single policy goal could still be considered legitimate in a democratic sense.

2. The central bank would be entrusted to use interest rate variations to pursue these narrow goals, which was tantamount to “democratic authorization”.

3. The judicial process can only assess whether the ECB has acted “within the confines of its democratically authorised mandate.”

4. The Treaty “was imbued by ideas and concerns that were prevalent in Europe at the time” – which means that monetarist ideas were dominant and the broader neoliberal consensus imposed tight restrictions on what governments and the central bank could do.

Hence we had – Article 125 – the so-called ‘no bailout clause’ as a centrepiece of the creation of the EMU.

The Dutch paper reflects that:

… it is not surprising that the ECB’s mandate reflects assumptions that have become highly contentious since then or even turned out to be false.

The problem was that the politicians and the bureaucrats were warned by several economists (including myself – in my earlier days) that the system they were creating would have no chance of sustaining prosperity.

But the ideological hold of the monetarists pushed Europe into a dysfunctional setup that would falter when the first test came along.

That was the 2003 recession which saw Germany and France push their fiscal positions outside the legal limits of the Treaty.

But as the Dutch authors note:

The dramatic events of the 2007-2008 Global Financial Crisis, the 2010-2012 Eurozone Crisis and the Covid-19 Pandemic have confronted the ECB with new challenges, which were not anticipated in the mandate.

The point is that these crises created this confrontation for the ECB because the Stability and Growth Pact rules meant that the Member States were heavily constrained from using the fiscal tools that had been left intact at the national level by the Treaty design.

So to save the Eurozone from meltdown, particularly in 2010 and again in 2012, the ECB, as the currency-issuer in the flawed system, had to move outside – and by a lot – the mandate that it was given in the Treaty process.

And that is why there are all these legal challenges to the legality of the ECB operations.

As I have said many times, the ECB saved the EMU from collapse by effectively operating illegally, even though the ECJ found otherwise.

See my book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – for a very detailed analysis of all these issues.

The Dutch paper observes that central bankers are being forced to recognise “that monetary policy impacts new economic policy objectives such as financial stability and environmental sustainability.”

So the concept of a narrow price stability target would seem to be somewhat outdated given the challenges that the monetarist paradigm assumed away – large-scale crises, etc.

This environment is thus:

In the existing institutional set-up, in sum, the ECB will continue to face what we term “authorization gaps”: the central bank has to make choices for which its mandate provides almost no guidance, but which have far-reaching consequences.

In other words, for a monetary system that professes virtue because it is so rule-driven, the day-to-day reality is a sort of ad hoc adventure where there are no rules.

It is like the wild west! Anything seems to go.

The Dutch authors examine how this ‘wild west’ behaviour by the ECB fits with the original democratic legitimacy that its narrow functions defined.

The “authorization gap” refers to the fact that “there is currently no clear democratic answer for many choices the ECB faces.”

The ECJ decision was a whitewash – it believed the official ECB line that all this bond buying was just part of its liquidity management function, which any reasonable economist knows is totally implausible – given the scale required and the scale executed.

Everyone knows that it was to keep the bond spreads low so that Member State governments could continue to access funds from primary debt investors.

They all looked the other way, when the debt was hoovered up ‘next day’ after the primary issuance by the ECB.

The ECJ just allowed the widest definition of the monetary policy mandate to be considered legal – which amounts to anything the ECB does! – and did not juxtapose the original concerns about democratic legitimacy.

That is why the BVerfG decision was so interesting. It was concerned about the latter – in particular whether the German public via its democratic voice (the German Parliament) – was involved in the radically broadened mandate being pursued by the ECB.

But as the Dutch paper notes this:

… puts the German judges themselves in a position of making decisions with immense consequences … If it is democratically illegitimate for the central bankers to make significant policy decisions, the same holds for the courts.

That was the interesting angle taken by the paper.

One of the things I am working on at the moment, which will be fully developed in in my next book, is the way in which political legitimacy is bestowed through public authority.

The current design of the Eurozone determines that the Member State governments are not ‘sovereign’ in the sense that they are forced to use a foreign currency and must issue debt to private bond markets in that foreign currency to fund any fiscal deficits.

Their fiscal positions must then take the full brunt of any economic downturn because there is no ‘federal’ counter stabilisation function.

The EMU is a federation without the most important component.

The decision by the Delors Committee in 1989 to ignore these recommendations reflected two realities:

1. The neoliberal ideology had become dominant and they didn’t want a major fiscal role for government in the new system.

2. But, relevant here, the decision to leave fiscal policy responsibilities at the Member State level reflected the diverse cultural, historical and language differences across the 19 Member States.

In particular, Germany’s dominant position in the European economy allowed it to dictate terms and there was never going to be a system established where permanent fiscal transfers could be made between states, which in the European context would have meant transfers from Germany to the South (mainly).

There was simply no European ‘demos’, which could force the creation of a truly federal Europe.

Which led me to conclude in – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – that the option for Europe to create an effective federal system was not viable.

That led me to recommend various orders of exit starting from the politically impossible orderly dissolution of the currency sharing to different forms of unilateral exit.

But the point was that currency sovereignty is only legitimised if there is a demos that accepts that sovereignty and all that it implies (permanent asymmetric spatial transfers and the like).

Importantly, while MMT places currency sovereignty at the centre of the macroeconomic analysis, and I consider that to be a necessary condition for underpinning an effective progressive agenda, there needs to be more work done on outlining what determines the political legitimacy of the currency sovereign government.

Why are some currency arrangements unworkable (such as the EMU) and others effective (Australia)?

The Dutch paper is about some of these issues.

Monetarism promoted the view that:

… democratic institutions are myopic and that their direct accountability to citizens precludes effectively implementing a long-term oriented monetary policy.

In other words, we just have to trust the technicians that determine monetary policy.

The reality is that this approach has not delivered on its promise.

So from an outcomes perspective – that democracy is intact if mandated entities actually deliver – the ECB fails.

Even within the bounds of its original narrow mandate, the ECB is failing.

Earlier German Constitutional Court decisions ruled that the Bundestag had to retain the powers (which reflected its legitimisation from the people) to control German institutions like the central bank.

And, while some transfer of powers to the EU was consistent with this, the Court clearly ruled that behaviour by European institutions that were “no longer covered by the Treaty would lack democratic legitimation from the Bundestag and could not be given effect in the German legal order.”

The problem will compound when the climate change challenges are introduced.

The Dutch paper concludes that:

… it is unlikely that the ECB will be able to incorporate the EU’s climate-related and environmental objectives into its operations without more formal backing, setting it up for new legal challenges. By not providing the ECB with adequate democratic guidance, the EU’s political institutions weaken it as an institution …

So by pretending that there was no need for bailouts, and screwing fiscal policy at the Member State level down tightly, the EU political elites have not only created a dysfunctional monetary system, but, have also reduced the quality and scope of democracy in Europe.

To reform that gap, treaty changes are required to broaden the scope of the ECB beyond narrow price stability targets.

That is unlikely to happen any time soon.


The current practice of ignoring the fiscal rule limitations and the bond-buying free-for-all from the ECB really highlight how dysfunctional the architecture of the EMU is as specified in the Treaty.

It survives, in part, because its principle monetary institution operates illegally.

What happens if a vaccine is found that ends the health crisis is anyone’s guess.

My view is that Europe cannot go back to the Stability and Growth Pact and the Excessive Deficit Mechanism any time soon.

How long the politics will delay a return to austerity is the issue.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

This Post Has 18 Comments

  1. “It survives, in part, because its principle monetary institution operates illegally.”

    Rule of Law 101: there is no law without enforcement.

    Ultimately somebody has to have the power to say no and have the coercive mechanisms to make it stick against whatever the objection.

    The ECB board is the defacto technocratic government of the Eurozone, and the majority seem to be fine with that.

    For now.

  2. This is a fascinating topic which I imagine must be central to Political Science (a discipline in which I have no formal training nor read widely) – how is legitimacy conferred upon the sovereign? And I mean this question in its broadest sense, not just with respect to currency issuance.

    At one time the doctrine was “divine right” – that an individual was somehow chosen by God; or in Chinese terms, “the Mandate of Heaven.”

    What has replaced this principle in our modern democracies?

    Then there are further complications where the judicial systems are concerned. What are the limits of their scope of jurisdiction? Who decides this and how?

    Finally, what responsibilities must the sovereign retain and exercise on behalf of the citizenry? At what point does failure to do so, or a decision to give those responsibilities away, constitute abdication and therefore justify revocation of legitimacy?

    So many threads …

  3. ‘The current design of the Eurozone determines that the Member State governments are not ‘sovereign’ in the sense that they are forced to use a foreign currency and must issue debt to private bond markets in that foreign currency to fund any fiscal deficits.’

    While here in the UK (and Australia etc) , we have sovereignty, but the groupthink is that the government must issue debt (and buy it back again) to private bond markets to fund any fiscal deficits (and keep on issuing debt to satisfy that lust even if there are fiscal surpluses). We have sovereignty, but we have democracy only with the reigns in the hands of the wealthy (whose scheming some of us can share in via a pension fund).

  4. “and the majority seem to be fine with that.”

    Because the majority had No idea what they were voting for, it was cleverly marketed to voters as something else.

    Case in point Scotland. The SNP act like a door to door salesman for the tooth fairy.

  5. Have you ever read such nonsense in your life.

    MMT and the EU: a case for capturing the prevailing narrative today by Richard Murphy.

    He knows He’s lost the economic arguement so comes up with this crap. He’s an arrogant, egotistical lunatic. He’s dangerous. He’s leading Scottish independence voters down the garden path.

  6. The MMT they talk about is Modern Marketing Tinsel. Quite a lot of that Tinsel being applied to many a moth-eaten ideas at the moment.

    It’s all largely just old-fashioned Keynesian pump-priming dressed up in ribbons that will inevitably lead to the same persistent inflation as the Post war period and for the same reason.

    Nobody wants to talk about how the punch bowl is taken away.

  7. Derek Henry.

    Yes, I thought it interesting that Bill and Richard should be paddling in the same pond today. Richard has banned me from his site for disagreeing with him. He cannot tolerate being challenged and dispatched dissenters with – stop wasting my time. On the other hand, there are a few good contributors who manage to survive. I think Helen Schofield should have her own blog. Anyway, Richard will go to his grave asserting that the EU can be reformed. Time will tell but Climate Change ain’t gonna wait for the slowest wagon.

  8. Rod,

    Wear it as a badge of honour.

    It is easy for him from his ivory tower he won’t have to live with the consequences in Scotland. Will he apologise to me, my brother, my sister and the 3 grandweans. Of course not. He can’t even reform the Labour party never mind the EU. I’ve been hearing the same arguement since I was 8 years old and I’m now 50. Just look what they did to Bernie and Corbyn.

    Richard plans to reform the EU all by himself he’s an egomaniac. Planned to reform it by voting REMAIN the status Quo. Ask Richard how reforming the Labour party is getting on. Why he hasn’t reformed it single handedly like he said he would.

    Tying EVERYTHING to climate change and putting a time limit on I feel will go down as another mistake.

    What happens if they are wrong. 10 years passes and the sky hasn’t fell in or the ground opened up. Just another stick for the right to beat everyone over the head with. We’ve put way too much economical capital into the world is going to end in 10 years time. It was foolish if you ask me. We should have kept climate change as a separate issue. The right think it is a conspiracy theory anyway and will jump all over it in 8 years time If we are all still alive.

    If the EU changes LEAVE voters will be the reason. Threatening to leave will be the only thing that focuses minds and may change things. More countries need to start threatening to do it is my honest opinion because the ECB and ECJ are biting at the bit to revert to type. The North will be the cheerleaders.

  9. My honest opinion is we should have left the “world is going to end in 10 years” to the Green Party.

    They are a joke anyway. What with their we are going to fight climate change with a basic income and Interest rate targeting.

    We concentrated on – the job guarentee is a transition job – if that’s what you want to do – here’s how you do it narrative.

  10. I can’t read about one aspect of a much-disguised version of the German Nazi state, without recalling that the EU laid a motion of hate against Maduro’s Venezuela. How many of the UK’s adherents to the EU will not mention such a travesty of justice.

  11. I work in the FIRE sector.

    There’s new banks popping up all over Glasgow on both sides of the Clyde. They are all sitting and waiting on the Green light to asset strip the place. I’ve seen it. That’s what Andrew Wilson who wrote the growth Commission is there to do. He is the Green cross code man and provides the Green light. An ex banker himself. That’s his mission his job description.

    Stop govt spending call for balanced budgets via the convergence program and Scottish media whilst preaching export your way to growth via a gospal supported by the church of Scotland. Give out £billions in loans to the capitalists and asset strip the country. There won’t be a thing they can do about it. The Indy movement are cheering them on from the side lines as they don’t know what they are voting for. Nobody is warning them.

    Once Scotland ‘s name appears on the EU fiscal surveillance for Scotland. Years later the Scottish public will realise what it all means.

    Then the liberals in the Guardian and Bella Caledonia can start calling Scottish voters right wing populists as they all start voting Tory. The Scottish public can start wearing yellow jackets and March into George Square getting tear gassed fighting for their grand parents and their own pensions as they are decimated to meet the 60% debt rule.

    I’ll be living the life of Riley on Fiji meeting Bill for bar b q’s at the weekend listening to his band. From all the money I’ve made via management fees, interest from the bond holders and capital gains from their profits. Saying to the Indy think tanks (the fake progressives ) I tried to warn you but you wouldn’t listen. You wouldn’t listen because you were too busy sucking at the teats of the SNP deluding yourselves.

    Ex SNP ministers are also all now loaded and each have holiday homes abroad. Ex SNP ministers who turn up every now and then for a photo opportunity in Glasgow and Edinburgh to cut a ribbon for a new food bank opening or soup kitchen for the ever growing numbers of poor people. The ones who couldn’t afford to leave the country and get a job somewhere else where Brussels didn’t rule.

  12. Amidst the dense verbiage of the de Boer and van ‘t Klooster article one passage in particular which leapt out at me was this:-
    ‘They (the German Constitutional Court judges, in Maastricht 1993) upheld the ECB’s independence as “a modification” of the democratic rights of citizens, which was justified by reference to

    “the special characteristic (tested and proven-in scientific terms as well-in the German legal system) that an independent central bank is a better guarantee of the value of the currency than state bodies”‘.

    So there you have it:- the German judges solemnly decreed based on purported (“tested and proven – in scientific terms”) grounds that “an independent central bank is a better guarantee of the value of the currency than state bodies”.

    No ifs, no buts – it’s a “scientific” fact! It must be, because a group of German judges have declared it to be. And it’s “science”, so don’t argue.

    Just how preposterous can such an ineffable bunch of wiseacres get? It’s piffle. Solemn piffle I grant you but unadulterated piffle nonetheless.

    I was also riveted afresh by the confirmation that when Mme. Lagarde as newly-appointed successor to Draghi announced that it was not part of the ECB’s role to regulate the yield gap (between German bonds and all the other eurolands’) for which – when the markets responded by drastically raising the rates they demanded from all the others – she was heavily castigated from all sides, she was merely reflecting the narrowness of the mandate which the ECB in fact has – ie she was castigated for being legally right. Her unpardonable error was to let the cat out of the bag while all the other EU bigwigs were intent on keeping it there. Like farting in church.

  13. @ Rod White,

    “Richard has banned me from his site for disagreeing with him. He cannot tolerate being challenged….”

    Me too! He accused me of lying when I pointed out that the eurozone countries were all using a foreign currency. He preferred ‘shared’.

    Some of what RM says is sort-of-OK, but when it comes to the EU he’s completely wrong. It bothers me that he’s trying to sell a package of nonsense, at least on the EU, which is clearly mislabelled as MMT.

  14. @ Derek Henry

    I’m moved to grieve yet again over the painful fact that we within the narrow confines of our little group of off-shore islands can’t manage to live together in amity, when what separates us is outweighed so massively by what we have in common. Why is this?

    Surely, a difference of opinion over Europe – of all things! – can’t be the explanation can it? Surely THAT can’t be what we allow to trash 300 years of fruitful co-existence? (That the Irish may view the English (and the Scots?) with suspicion is hardly to be wondered-at given the history. Though even there, when one considers that one of the greatest of Victorian Englishmen, Gladstone, sacrificed his party on the altar of Irish Home Rule the record is by no means all black. I say nothing about the Welsh; although – while by no means to be taken for granted – they do seem rather less inclined to break away).

    We English need you Scots to keep us on the straight and narrow. Can’t we confine our rivalry to the sporting arena?

    Or is it the old question “Cui bono?” – or as it was more crudely put at the time of Watergate “follow the money”? Who benefits? Certainly not the ordinary people, it seems to me.

    It’s all very sad.

    As for Murphy, words fail me.

  15. Robert,

    Simple all the UK govt needs to do is credit the Scottish consolidated fund with more blips.

    Enough blips to kill off independence. But that means they have to kill off the Nobel lie. How monetary systems actually work.

  16. Thanks for this interesting thread.

    I think you’ll find useful Haldane’s speech (28 November, which can be found on the BoE’s website) as he “mulls” over Central Banks’ Independence. He also (briefly) talks about the view of the German Constitutional Court about the PSPP.

    Anyway, I have just wanted to mention that speech because one can really understand, behind the verbiage that the notion of Central Banks’ Independence is an absolute political construct and has little to do with “economic theory”….

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