The ECB’s authority


A year ago the European Central Bank finally agreed to ease Ireland’s debt burden, by allowing the State more time to repay the money borrowed to rescue Anglo Irish Bank. Promissory notes issued by the Government to recapitalise Anglo Irish, held by the Central Bank, were exchanged for long-term bonds. Debt repayable within 10 years instead became repayable within 40 years, resulting in significant savings – an estimated €20 billion.

The settlement between the Government and the ECB also marked a major turning point in Ireland’s economic recovery. And that settlement facilitated the State’s successful exit from the EU-IMF programme last December. In Ireland, Taoiseach Enda Kenny saw the debt swap as securing “the future financial position of the State”. The central bank’s reaction was more low-key and circumspect. ECB president, Mario Draghi, merely observed that council members had unanimously “taken note” of the debt swap arrangement. Mr Draghi’s carefully chosen words, reflected a concern among some members – notably Germany – that the deal risked breaching Article 123 of the EU treaty. This prohibits monetary financing of a euro zone member state by a central bank. The ECB agreed to investigate this aspect.

The ECB’s slowness in completing the review may well have reflected its concern about a case before Germany’s constitutional court on the legality of the central bank’s bond buying programme. Mr Draghi in 2012 pledged to do “whatever it takes” to save the euro – known as the Outright Monetary Transactions (OMT) programme. His words calmed markets, and no bond buying has been required. Yesterday, the German court referred the decision on whether the OMT programme exceeded the central bank’s powers, to the European Court of Justice. The ECB is confident it has remained within its mandate on this issue. Likewise, it will be surprising if the ECB, in its review of last year’s debt deal with the Government, finds that the central bank there exceeded its authority.