On December 22, 2011, the
Financial Times has discussed the possibility and
appropriateness for the European Central Bank to carry out
quantitative easing operations. In his FT interview, Lorenzo Bini
Smaghi has argued in favor of such operations and called for
“policymakers not to hide behind lawyers to avoid taking
action”.
When reading this
interview, I was wondering if and how policymakers can hide. My
conclusion is that the legal texts support Smaghi’s point of view
and, as a matter of fact, contain no stipulation that could
reasonably justify a prohibition of QE operations.
Let’s have a look
at the texts:
The Statute of the
European System of Central Banks (Protocol No. 4 of the Treaty on the
Functioning of the European Union) reads as follows:
“Article 18 - Open
market and credit operations
18.1. In order to
achieve the objectives of the ESCB and to carry out its tasks, the
ECB and the national central banks may:
- operate in the
financial markets by buying and selling outright (spot and forward)
or under repurchase agreement and by lending or borrowing claims and
marketable instruments, whether in euro or other currencies, as well
as precious metals;
- conduct credit
operations with credit institutions and other market participants,
with lending being based on adequate collateral.
18.2. The ECB shall
establish general principles for open market and credit operations
carried out by itself or the national central banks, including for
the announcement of conditions under which they stand ready to enter
into such transactions.”
“Art. 21 –
Operations with public entities
21.1. In accordance
with Article 123 of the Treaty on the Functioning of the European
Union, overdrafts or any other type of credit facility with the ECB
or with the national central banks in favour of Union institutions,
bodies, offices or agencies, central governments, regional, local or
other public authorities, other bodies governed by public law, or
public undertakings of Member States shall be prohibited, as shall
the purchase directly from them by the ECB or national central banks
of debt instruments.
[…]”
On the basis of the
above, my conclusions are as follows:
The ECB has 3 alternative
possibilities to act on the financial markets:
- buying and selling
[claims and marketable instruments] outright (spot and forward);
- [buying and selling
claims and marketable instruments] under repurchase agreement;
- lending or borrowing
claims and marketable instruments.
In my view, the first
alternative covers quantitative easing operations. As a matter of
fact, only direct underwriting is prohibited by Art. 21.1 of the
Statute.
Based on Art. 18.2 of the
Statute, the ECB has established its guidelines on monetary policy
instruments and procedures of the Eurosystem (lastly modified on
September 20, 2011). It is right that, today, these guidelines do not
provide for QE operations (See Art. 1.3.1). However, the ECB can
modify its guidelines on its own, and the European treaties should
not contradict such modification.
