In my recent post on the ECB’s Securities Market Programme (SMP), I noted that the programme was in violation of the Treaty of the European Union. I based this on Article 21.1, which states:
“. . . 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.”
– Article 21.1 of “ON THE STATUTE OF THE COURT OF JUSTICE OF THE EUROPEAN UNION”, in “Treaty on European Union and Treaty on the Functioning of the European Union“, 2008.
I also mentioned that ECB Governor Jean-Claude Trichet in this interview stated that the programme is not violating the letters of Treaty, and that I therefore obviously did not understand article 21.
I indeed did not. The key behind my misjudgment is the word “direct” in the Treaty. I failed to understand that this means that “indirect” purchases of government debt are just fine. And “indirect” purchases are indeed what the ECB is carrying out. They explicitly operate on the secondary market for government bonds; i.e., they purchase at financial institutions.
So Trichet is correct. The ECB is not violating the letters of the Treaty by the SMP. I can’t, however, help wondering whether this was the intention of the treaty. It is difficult to imagine the founding fathers/mothers to have contemplated: “Let us forbid the future EU central bank to bail out any EU government in fiscal distress”. “Oh well, let us not, let us just make sure that it does so through financial intermediaries”. (To emphasize, the ECB is currently not monetizing public debt, as they withdraw the liquidity from bond purchases on an ongoing basis.)
In June 2010, a month after the initiation of the SMP, Trichet also said, when asked about certain European countries potentially defaulting on their debts: “We won’t allow that to happen“.
