April 21, 2016

Blinder: European Central Bank shifts with political winds

Alan Blinder
Lindsay France/University Photography
Alan S. Blinder, Cornell’s 2016 Henry E. and Nancy Bartels World Affairs Fellow, speaks April 19 at Statler Auditorium.

In terms of design, the European Central Bank (ECB) seems to be the most independent central bank ever established. No one government controls it and it was structured through a treaty that is virtually impossible to change.

But in what seems to be the almost never-ending crisis in the eurozone, the ECB now seems to be more embroiled in politics than almost any other central bank on the planet, according to Alan S. Blinder, Cornell’s 2016 Henry E. and Nancy Bartels World Affairs Fellow.

“This is the paradox. It is designed to be hyper-independent, but it doesn’t look very independent,” said Blinder, the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University. “The ECB is now living in a different world than was envisioned in 1998, when it was founded.”

Blinder, a member of President Bill Clinton’s Council of Economic Advisers in 1993-94 and vice chairman of the Federal Reserve System’s Board of Governors from 1994 to 1996, lectured on “The Evolving Political Economy of Central Banking,” April 19 in Statler Auditorium. Blinder’s lecture was part of the global conference “The Changing Politics of Central Banking,” held at Cornell April 18-19.

The ECB’s politicization began with the worldwide financial crisis but became much more severe when the European sovereign debt crisis blew up beginning in and centered on Greece.

Several differences between the Federal Reserve, the United States’ central bank, and the ECB made dealing with a crisis tougher for the ECB than for the Fed, Blinder said. For example, the Fed has two mandates: to keep inflation and unemployment low. In contrast, the ECB has only one: to keep inflation low. “I think that’s one reason why the ECB reacted more timidly than the Federal Reserve. The Fed cut interests rates very fast and very aggressively; the ECB gave ground much more begrudgingly because it had no mandate to promote low unemployment.”

And then there’s the excruciating difficulty of the central bank lending to another country, such as Greece, and the problem of how many losses they share if some of those loans don’t get paid back, he said.

“The ECB’s job was then and is now very substantially more difficult for a lot of reasons that are either quite clearly political or quasi-political,” Blinder said.

The ECB’s involvement in the sovereign debt crisis began in 2010, when it decided to buy some debts of peripheral EU countries, including Greece, through the Securities Market Program. That involvement had intensified by 2014, when the ECB joined the “troika” of the European Community and the International Monetary Fund to discipline Greece.

“It’s pretty unusual to put a central bank in the role of an enforcer to a government,” Blinder said.

By 2014 and into 2015, the ECB was basically keeping the Greek banking system alive by doing what central banks do: being the lender of last resort to a bank that otherwise had no other place to turn. And that made the ECB the one to pull the plug on Greece in the beginning of July 2015, which ratcheted up the crisis, Blinder said.

“Don’t get me wrong. I don’t mean to say that the ECB was wrong and Greece was doing everything right. Hardly. The point is, this was a very dicey situation to have to be in as a central bank. … This is a pretty big change in the politics of central banking, and as someone once said, ‘We’re not in Kansas anymore.’”

One thing that would help the ECB with its political woes would be the creation of a market for a eurozone bond, although he doubted it would happen. A eurozone bond would be the debt of the eurozone in the same way that Treasury bills, which is what the Fed deals in, are a debt of the U.S. government.

“The ECB doesn’t have that,” Blinder said. “If it goes into the federal bond market, the first question is, which government bonds are we going to buy? And that can be a very difficult question that the Fed never has to ask or answer.”

The Henry E. and Nancy Horton Bartels World Affairs Fellowship, established in 1984 and hosted by Cornell’s Mario Einaudi Center for International Studies, brings prominent international leaders to Cornell to foster a broad worldview among Cornell students.