Writing its own Rulebook: The European Central Bank and the Euro Area Sovereign Debt Crisis

Several studies have pointed to the range of new policy tools adopted by the European Central Bank (ECB) to tackle the sovereign debt crisis largely to fill a void created by inadequate government action (Salines et al. 2012. The adoption of these tools stems at best indirectly from the ECB’s price stability mandate, while in some cases the tools adopted potentially contradict this mandate. This paper applies a principal-agent analysis to argue that the ECB has slipped by adopting a number of policy tools that directly contradict the preferences of at least some of the Member State principals — both at the time of delegation in the Maastricht Treaty and at the time of adoption during the crisis. Five cases are examined: the Securities Markets Programme (SMP), Long Term Refinancing Operations, (LTRO), Outright Monetary Transactions (OMT), the hosting of the Single Supervisory Mechanism (SSM) and the setting of European Banking Authority (EBA) supervisory guidelines. In all five cases, explicit member state opposition was presented (often publicly) to ECB slippage -- notably opposition from the German federal government. In the case of extending ECB control over the SSM, while publicly stating its neutrality, evidence shows that the ECB pushed actively to host euro area banking supervision. This was despite member state government concerns that responsibility over supervision would hinder the pursuit of the bank’s monetary policy mandate. Given the difficulty of treaty reform and the independent status of ECB Governing Council members, the principals (member state governments) lack both adequate ex ante and ex post controls to check the ECB’s slippage. This paper explores the — largely unsuccessful — member state efforts to reassert control over the agent.