Promissory deal a breach of ECB rules, Stark says

Ireland’s new promissory note arrangement is a clear breach of the European Central Bank’s prohibition of monetary financing, the former ECB executive and chief economist Jürgen Stark has said.

Dr Stark’s disapproval follows fresh criticism from the Bundesbank in its monthly report yesterday that the deal underlined “increasingly stronger and more problematic inter-linkage between monetary and fiscal policy in the European monetary union”.

These arguments reflect a long-term fear of German monetary hawks that the ECB, in its efforts to assist in resolving the euro zone crisis, has broken its own rules, compromised its independence and made itself beholden to politicians.

Dr Stark said yesterday the arrangement with Ireland was a further demonstration of “the ECB’s new understanding of crisis management”. “The ECB’s contractual basis and core mandate shift further into the background,” he wrote yesterday in Die Welt daily.

Dr Stark resigned in protest at ECB bond-buying of crisis-hit euro states in 2011, following Bundesbank president Axel Weber out the door. Both have since been regular critics of the bank’s crisis strategy. “An independent central bank . . . cannot turn the prohibition of monetary financing into a bargaining chip,” Dr Stark said.

That had happened, he suggested, by allowing the Central Bank of Ireland to breach article 123 of the European Treaty forbidding monetary financing and transform into bonds the “legally dubious” Anglo Irish promissory notes.

The German economist said the ECB’s decision to “take note” of the decision implied state financing had taken place. The only logical consequence should be to push the Central Bank to sell off its bonds as soon as possible – which is the view of the Bundesbank.