Mario Draghi fights a battle for independence at the ECB

14/1/2015

Peter Spiegel in Brussels and Claire Jones in Frankfurt

The much-hated “troika” that has overseen a succession of eurozone bailouts may be dismantled — not by voters enraged at its demands for austerity but by a top official at the European Court of Justice.

In an interim ruling on the legality of the European Central Bank’s 2012 bond-buying plan, the EU’s top court on Wednesday gave a green light for full-blown government bond purchases.

But in an opinion that could have far-reaching consequences, Pedro Cruz Villalón, an advocate-general of the ECJ, said that if the ECB ever activated Outright Monetary Transactions — a bond-buying scheme created to help eurozone bailout countries — “it must refrain from any direct involvement in the financial assistance programme that applies to the state concerned”.

Olli Rehn, the Finn who ran European Commission policy in the five eurozone bailouts at the height of the crisis, said the opinion appeared to signal the end of the troika — the ECB, the commission and the International Monetary Fund — which has managed all rescues since the crisis began in 2010.

The troika’s role in demanding economic reform and austerity in return for loans in Greece, Ireland, Portugal and Cyprus has made it a highly controversial partnership. Its instructions have helped fuel the rise of Greece’s radical left Syriza party, which is poised to win snap parliamentary elections on January 25.

“The ECJ advocate-general’s report looks quite categorical and would seem to end the ECB’s participation in the EU-IMF troika in the case of an OMT activation,” Mr Rehn told the Financial Times. “This would probably mean the beginning of the end of the troika in its current form, which would in turn push the eurozone to yet another important institutional reform.”

The European Commission would not comment on the decision. But officials noted that Jean-Claude Juncker, the new commission president, has advocated a change in the troika process since the outset of his tenure.

“Of course we cannot go with the troika as it is,” Mr Rehn’s successor, EU economics chief Pierre Moscovici, told the FT during a visit to Athens last month.

Senior eurozone officials cautioned that the commission had long sought to take control over eurozone rescues from the other members of the troika but had been thwarted by a German-led group of countries that did not fully trust Brussels to drive a hard bargain with bailout governments.

In addition, many of the rescue structures created during the crisis, including the eurozone’s €500bn rescue fund, foresee a direct ECB role. The court’s ruling could force leaders to rework them.

The ECB has long been uncomfortable with its role in the troika. Peter Praet, a member of the ECB’s executive board, said in December the central bank had been “led by necessity” to join the group, and that this had put a lot of pressure on the institution.

Officials said they would probably be forced to find ways to allow the ECB to advise bailout monitors even if they were forced out of the troika missions in countries receiving OMT support.

Mr Rehn said that the ECB often played a critical role in implementing reforms of the banking sector in bailout countries and predicted that ECB expertise would be needed in some other way.

Even outside the troika, the ECB would still possesses the ultimate weapon to force recalcitrant governments to swallow austerity and reform: the ability to cut off liquidity to a country’s banking system.

In 2013, the ECB told the Cypriot government that it would stop “emergency liquidity assistance”, a move that would trigger the collapse of the banking system or eventual eurozone exit, if it did not accept the terms of a bailout.

The central bank is particularly resented in Ireland after it forced Dublin to honour senior debt in its collapsed banks in return for its international bailout.

At times during the eurozone debt crisis, the ECB came close to overstepping its technocratic mandate. In 2011, its then president Jean-Claude Trichet sent an uncompromising letter dictating a detailed economic policy agenda to Silvio Berlusconi, Italy’s wavering prime minister, and his Spanish counterpart José Luis Rodríguez Zapatero.

Mr Trichet’s letter implied that the ECB would not come to the rescue of Spain and Italy by purchasing their sovereign debt unless they implemented his recommended economic reforms.

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