Staggering Cost Of ECB and Troika’s mistakes

The title of the article is Grexit: The Staggering Cost Of Central Bank Dependence. But should be titled as this post has mentioned – Staggering Cost Of ECB’s mistakes.

Prof. Charles Wypsolz in the piece point to ECB’s mistakes in the whole Greece episode. Not to forget how the whole world hyped Draghi’s magic to settle markets:

More generally, the ECB must accept its share of responsibility for the disastrous management of the Greek sovereign debt crisis. It was the ECB that refused in early 2010 a write-down of the Greek debt (Blustein 2015). Counterfactuals are never fully convincing, but a good case can be made that this decision is the reason why the Greek programs failed. An early write-down would have provided enough relief to avoid the deep and front-loaded fiscal stabilization that plunged Greece into a long lasting depression. An early debt write-off would have reduced its borrowing needs and the steep debt build-up that followed. Today’s debt could well be perfectly sustainable.


Furthermore, by joining the Troika, the ECB also chose to play a strange role. In normal programs, the IMF sits on one side of the table while the country’s authorities, the government and the central bank, occupy the other side. By being on the lenders’ side, the ECB found itself in the position of imposing and monitoring conditions. This is one aspect of the more general point made by De Grauwe (2011).

The deep reason for the Eurozone sovereign crisis is that the euro is a foreign currency for member countries. It also provides an example of how deeply politicized the ECB has become. No other central bank in the world tells its government what reforms it should conduct, nor how sharp should fiscal consolidating be. As a member of the Troika, the ECB was instructing Greece to carry out deeply redistributive policies, for which only elected politicians have a democratic mandate. In the end, it must accept the blame for poorly designed policies that have provoked a deep depression and its political consequences.

The decision to freeze ELA is taking this politicization process to a new height. In effect, the ECB is pushing Greece out of the Eurozone. Politicians may debate about the wisdom of making Greece leave. As non-elected officials, the people who sit on the Governing Board of the Eurosystem have no such mandate. A charitable interpretation is that they felt that many governments would harshly criticize keeping the flow of liquidity to Greek banks open after the Greek government in effect closed the negotiations by calling a referendum. This is true, but central bank independence is designed to prevent this kind of pressure.

All over the place. And you never know. If Draghi is replaced with some more hyped chief who could reverse the sentiment temporarily, perception might change overnight.

Further, there are issues on ECB independence (no matter how misplaced the term is one keeps hearing it):

On paper, the ECB enjoys full independence. Its Board members cannot be revoked and their long eight-year mandate cannot be renewed, so that they do not have to please member governments. Yet, they reluctantly violated the no-bailout clause to please member governments. Then, it took three years to decide on the Outright Monetary Transactions (OMT) Programme – which brought immediate relief – because some member governments opposed it. For the same reason, they started QE seven years after the Fed, probably contributing to the longest period ever of no growth in Europe. And now they are triggering Grexit, which will radically transform the Eurozone. Adopting the euro is no longer irrevocable, a fact that is bound to agitate the financial markets with unknown consequences. Greece is not the only victim; the governance of the Eurozone has been shattered.

As American counterparts would say, the governance played a huge role in setting up a flawed union. So it is a fitting tribute to them. Just that nothing much will happen to those who governed the mess and most burden to be faced by citizens. This always has been the case in global politics and economic history. Seldom do designers and policymakers face the brunt. Infact, they only grow more powerful as brilliantly etched in this book.


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