The ECB Method

by Henry on January 3, 2012

Two months ago, I wrote a post which argued, among other things, that the European Union used to be run according to the ‘Community Method’ (according to which member states often used to defer to each other on matters of vital interest, and the Commission had an important role), had moved to the so-called ‘Union Method’ (under which member states were supposed to do stuff on their own, in practice being led by France and Germany), and was now transitioning towards the `ECB Method’ (under which the European Central Bank determined politics). I suggested that this was going to be untenable, and hoped that we might see a push instead towards greater democracy. Well, we didn’t get one. Instead, what we’re getting is the ECB method on steroids. By supporting bank borrowing rather than sovereign state borrowing, the ECB has managed to prop up the system without openly changing its mandate. But by doing this under the table, and without very much in the way of an officially stated long term policy, it has retained and indeed arguably dramatically expanded its political clout.

I don’t have sufficient expertise to make strong claims about whether this will be a sustainable way of propping up bond markets for any significant period of time. What I am convinced of is that it will be a political disaster. As Cosma Shalizi and I argued (Cosma puts it “much better”: than I did) about libertarian paternalism, the problem is that it “break[s] the feedback mechanisms which (1) keep policy-makers accountable to those over whom they exercise power, and (2) allow[s] policy-makers to tell whether what they are doing is working, and revise their initial policies and plans in light of experience.” This dynamic can be extended to explain why the European Central Bank is making a complete hash of the European economy. I’ve spoken to people at the European Central Bank – they are very smart, and very sincerely believe that the best path to long term prosperity is through enforced austerity. They are also – by design – nearly completely insulated from democratic pressure. And despite claiming that they are apolitical, they are in fact playing a profoundly political role, dictating the kinds of domestic institutional reforms that states need to implement if they want to continue getting ECB support.

This means that ECB decision makers are under no very great obligation to think about why they might be wrong, up to the point where complete disaster occurs. And disaster is very likely, if the lessons of the gold standard in pre-World War II Europe tell us anything at all. Enforced austerity does not produce economic growth. What it does produce is political instability.

This is why we should be deeply skeptical of claims for technocracy as a way of making political decisions. Technocracy is supposed to work better because it is insulated from political pressure. But exactly because of that, it is liable to go off the rails when left to its own devices. Expertise is a very good thing – when it is leavened by democratic accountability. When it is not, it is likely to be responsive instead to its own internal discourses and understanding of the world, which can lead it in some very problematic directions. It isn’t just that the eurozone is an experiment in the economic virtues of imposed austerity (as a means of creating confidence and hence a by-its-own-bootstraps cycle of virtuous growth). It’s that the experiment is already visibly failing. And it’s that despite this visible failure, there is little chance of any reversal of direction, because those who have the power to set the course have no obligation to listen to anyone else, and hence aren’t listening.