ecbRight now, Italian 10-year bond yields have passed the 7% mark – a figure thought to be unsustainable by many analysts. The European Central Bank (ECB) may be forced to step in and buy up massive amounts of Italian government debt in order to prevent the country from turning, like Greece, Ireland and Portugal before it, to the EU/IMF for a formal bail-out. Worryingly, it remains to be seen whether there will be enough money in the EFSF (the EU’s “bail-out fund”) to prop up the third largest economy in the Eurozone.

In our last post, we had a comment come in from Patrick Leneghan arguing that more attention should be paid to movements such as “Los Indignados” and “Occupy Wall Street”, which are protesting against the current status quo in the global financial system:

Again, [there has been] no discussion as to what ideology or economic system to adopt and worse, the propaganda that there is only one set of economic rules available. This is fiercely disputed around the globe, the ‘occupy’ movement being one example. As many citizens have correctly identified, it is this current financial system (aka ideology) that is the cause of all of these problems.

Debating Europe recently spoke to some of the protestors from Spain involved in the Indignados movement. These movements have been criticised in the past for failing to suggest any specific solutions to the crisis, instead advocating “protests over policy”, but the common theme when speaking to the protestors was disillusionment with the current political and financial system. One protestor, for example, wanted to see an end to professional politicians, instead suggesting that politics could become a voluntary activity with everybody participating part-time.

We took some of these sentiments to Peter Praet, a Belgian economist and a member of the six-person Executive Board of the European Central Bank. The Executive Board is responsible for the monetary policy of the Eurozone, and so the board members are currently right at the centre of the Eurozone crisis. We asked Peter Praet: “Are we seeing a crisis of democracy in Europe?”


If you look at sovereign debt, checks and balances in our democracies have not performed sufficiently well. Future generations are not sufficiently defended in our current system. They cannot vote. We have shifted risks to future generations: many difficult challenges can be pushed into the future in the form of debt. We saw weaknesses due to ineffective public governance and market failures. In a number of countries there were budget rules such as the “no bail-in rule”, the balanced budget rules, etc. But these rules obviously were not strictly followed. Also, everybody knew before the crisis that measures were needed to maintain the sustainability of public debt in many advanced countries because of the ageing population in these countries. But these measures were too often postponed.

One protestor we spoke to, however, expressed his frustration at precisely this. He was angry about politicians agreeing to put a constitutional limit on public debt in Spain:

If we accept that future generations cannot vote on national budgets, but nevertheless have an important stake in them (because they will be paying off any debts accrued), then we are faced with a dilemma. Should there be constitutional rules to stop democracies from borrowing too much and passing the problems on to future generations? Let us know what you think.

Speaking of “rules”, of course, is the ECB now breaking them? Is it overstepping its mandate by buying up government bonds in Italy? Here’s Peter Praet’s response:

No. We are in a context with a lot of market disruptions, where market liquidity can evaporate quickly because of panic reactions. As a result, monetary policy transmission mechanisms do not work sufficiently well. You give an impulse on an interest rate and it’s not passing through the whole financial sector.

That’s why we intervene in the market with unconventional measures, to restore the monetary transmission. However, this cannot become a chronic situation. If it becomes a chronic situation, it would mean that it is not related to a situation where markets are in a panic mood, but to more fundamental issues about doubts of stability in some countries. And that’s absolutely clearly beyond the mandate of the central bank. It’s one thing to accept interventions to facilitate better transmission where there’s a lot of noise in the market. It’s another thing when there are fundamental doubts about the sustainability of some countries. Clearly, it is not the task of the central bank to intervene in the latter case.

If you accept the analysis that bond market discipline didn’t work, then it is not by intervention of the central bank on a continuous basis that you would solve the problem.

What can be done, then, to improve the situation?

Any solution is going to be tough. It should be [implemented] as smoothly as possible and avoid something that would be too damaging. Action is needed in both the private and the public sector. Important measures are being taken. You have the whole regulatory package at the G20. You have to define well the rights of equity holders versus debt holders in the financial sector and banks in particular. In the public sector, you need an improved rules-based system. If you accept that future generations cannot impact national budgets, then you have to put some rules that are really binding for those budgets. This was missing, and so needs to be achieved.

It is something that was long due. Unfortunately, it comes in a very harsh way – but you must remember that even before the crisis there were concerns. At that time, decision makers thought they had ten years to prepare for an aging population. Now, with the economic slowdown because of the crisis, we have lost, in many countries, those ten years. Reforms have to be pushed faster than what was planned. It had to happen anyway, but now it has to happen faster. The problem was already there before the current crisis.

What do YOU think? Do you agree with those protestors that want to see a radical new approach to democracy, with more direct participation from citizens? Or will more direct democracy mean future generations (who cannot vote) must pay for our mistakes? Has the ECB broken the rules by intervening in Italy? Or is the crisis so serious that they had no choice? Let us know in the form below, and we’ll take your comment to politicians and experts for their reaction.

Vote 2014

Voting is closed in our Debating Europe Vote 2014! The results are now in, so come and see what our readers thought!



9 comments Post a commentcomment


  1. Leonardo Baggiani

    Politicians have created a world of voters illused to be satisfied in their every request at the expenses of someone else, and to be satisfied in as short a while as desired.
    Today we see this was an illusion, but a lot of people (over 40y) keep “crying and yelling” hoping that they will obtain something as it has always happened; they do not know how they have collected favours in the past and are simply not concerned of. They cannot see they (we) are the generation who (or whose children) has (have) to pay for the past over-satisfaction.
    Politics has taught people of an unsustainable idea of what is reasonable (both in magnitude of requests and time of realisation); politics is able to ride this discontent but unwilling to tell the truth.

    You can talk as mush as you like about democracy, banks, rules and so on. But the first thing to do is admitting the basic truth: it has come the end of the continuous stealing the future of generations to come, as WE (40y and younger) are the final impoverished generation.
    Whatever you do before telling this truth is just (political) cabaret.

  2. Christos Mouzeviris

    Why are we giving way too much power to the Banks and the Markets anyway.. I do not agree with this system. It needs revision. Since when the needs of the Markets and the Banks must be above the needs of the people? Why do we need constantly to have growth and more profits, instead of giving people a healthy lifestyle? and who gets these profits anyway..certainly not me or anyone I know, and certainly not the people of Europe!

    You say that we can not sustain our social welfare system and people need to work more and get paid less…with less benefits.. that of course will lead them not to have any children anymore, as they do in Europe. Simply because they won’t be able to afford them. As sad as this sounds!

    So that means less future tax payers and workers! Hello? if I can think of those things why can’t you? so you are trying to balance all this mess out, with immigration. and even this you can not make it right, because instead of looking for immigrants that are more compatible with the European culture (Latin America), you are importing people from totally different cultures and we see a culture class brewing all over Europe (don’t dare anybody call me racist because Brazil is anything else but a “white” country..race is not the issue here, rather the cultural heritage).

    so this is gonna go on and on until one day is going to explode at your faces…it is already happening. aka Norway..why? because of your greed! You always want more, more wealth, more power and let the hamsters (us) running faster to keep the wheel spinning.

    you either allow people to have a decent life, with social benefits and more free time so they can have children who will become future hamsters workers and tax payers, or you are gonna keep pumping immigrants to keep the balance of people having less children..but the people are trying to give you a message..they did it in Finland when they elected the True Fins party, they did it in Britain when they elected the BNP, they did in in Greece when they elected the LAOS party, in Austria, in Switzerland….in many European countries..When there is an immigration problem, plus an economic crisis people turn to the far right..and that is dangerous! we have been there before through WW2, and what happened in Germany. An economic crisis, unemployment and an anti-immigrant feeling, led us where it lead us..Why are we repeating the same mistakes?

    keep it real people…a hybrid political and economic style i think would suit us more…part capitalist, part socialist…and stop turning people into manic consumers…stop bombarding them with silly things, advertisements, reality TV, gadgets that they do not need..We need quality education, health care, pensions for the future…try to work on those, instead of feeding the fat cats…..ok?

  3. Christos Mouzeviris

    let me make the equation easier for you….
    more quality/free time with social benefits+ less consumerism and capitalism= more children=more workers and tax payers=more people to work pay taxes and sustain the economy..and more consumers if you like it….

    less wealth for the few, more wealth for the many…aye!

  4. Alfred

    There seems to be three basic misunderstandings in this current crisis.

    1) That debt can be rolled over for ever and ever. Money borrowed has to be repaid eventually.

    2) That this can only be solved on a global scale – that just leads to global problems. A world made up of sovereign nation states has an inbuilt balance, protecting some from the excesses of others and protection from the sort of global mess that we are in. Foolish states suffer the consequences of large devaluations whilst prudent states continue and help out, where they can. Thinking that they can all be forced together into regional or global governments, that will some how magically bring about peace and happiness, is mere folly and ignores the lessons of history.

    3) That the banks have to be protected. The longer they are protected, the more painful the inevitable failure. Nation States should be looking at their own banking infrastructures, exposure to foreign banks and deciding upon their own national rules, whilst at the same time debating and agreeing international methods that do not expose their own countries to the debt of others. Some nations will deal with this better than others.

  5. Robert W

    papering over the cracks wont work, we’ve known from the start that the euro will fail. The ECB and IMF should not be throwing more money after bad! Nations can then default, get back their sovereignty and in the process cause the final shut down of the EU project (although defaulting is not pleasant for the world economies, the upside of destroying the EU dream is well worth the cost). Its not good for all these countries who went in to the euro, but its not as though there is any other viable option…… and, besides, it was a mathematical certainly (ie absolutely no doubt) that the euro would fail from the start, as any real economist would know.

  6. Johno

    The ECB (or its German veto-holders) must decide whether to buy bonds like crazy and contravene its mandate, or preside over the mother of all crashes as the Euro becomes a slow motion train crash.

  7. Bradford

    A liquidity issue starts with doubts on solvency! If members of the ECB don’t understand that fundamental point how can they or anybody expect politicians to understand that fact. Italy is stagnating its way to insolvency. If this ECB board member does not understand this and does not understand the grave implications of their attitude he should be fired a.s.a.p.! A fellow Belgian mr. Paul de Grauwe said it correctly it is time for the ECB to step in and take out the guns and provide unlimited supply (read print) of Euro’s – history is not kind to those countries (or currency unions) where the Central Bank does not support its members.

    What he and all Germans and others on the ECB should remembered is that Europe is the birthplace of the modern-day Social Welfare State (i.e., modern-day democratic Socialism). The financing of a Social Welfare State is burdensome (as we are now seeing across the world). Those who are productive and engaged in profit-generating activities are forced, by law, to pay for “transfers” to those who otherwise would not be similarly compensated in voluntary exchange. That is the basis of the political system of every country on the face of this planet.

    When Social Welfare States were established in the early-20th Century, the means of financing was also established. There are two primary ways to finance the government: Taxation and Borrowing. The role of taxation in financing the government is obvious. The role of borrowing is less so.

    Under a gold standard, the amount a government can borrow is severely limited because there is no “buyer of last (or first) resort” for that debt. That is, there is no central bank that can arbitrarily buy government bonds (print money). Debt monetization is not possible under a true gold standard, which means that the market for government debt is limited. That is the reason why the classical Gold Standard was eliminated in the early-20th Century. It stood in the way of the financing of the newly-formed Social Welfare States. In fact, Central Banks were established with the explicit intention of financing the respective governments, with Europe leading the way. Central Banks are not part of free-market Capitalism, but the exact opposite. Here is what former-Fed Chairman Volcker had to say about this topic:

    “Central banks are not exactly the harbingers of free market economies….central banks were looked upon and created as a means of financing the government.” Paul Volcker, “The Role of Central Banks,” Federal Reserve Bank of Kansas City, 1990.

    As Barry Eichengreen, an economist at UC Berkeley and one of the foremost experts on the Great Depression, has pointed out, the gold standard greatly contributed to the severity of banking crises during the 19th century and up to the depression. Stuck inside a monetary straitjacket, governments found themselves depleting their reserves in order to maintain their fixed exchange rates, leaving them incapable of mobilizing the fiscal firepower to nationalize the banking system and engage in stimulus spending. Thus, while it was designed, to provide global monetary stability by minimizing the exchange rate risks for financiers and exporters, the gold standard actually ended up being a noose around the neck of central banks and policymakers alike.

    Ultimately, governments were left with only one policy option in response to the crisis: internal devaluation — beautiful economic doublespeak for wage repression. This appears to have been a major contributing factor to both the severity of the slump and the escalation of human suffering. The question that arises, then, if we look at the ongoing European debt crisis, is stark: is the euro not today’s version of the gold standard?

    As such the easier path is a cap on deficit spending and the ECB supporting the welfare state. It has to come from both sides. If only one part plays – austerity – we are bound to repeat the (huge, costly and multiple) mistakes of the past and they are too obvious to miss.

  8. ECB-Watch

    At the suggestion of a member of Debating Europe I am adding a comment.

    I’m afraid the two groups involved in this debate are so far apart, that any a dialogue between them is bound to misunderstanding.

    If it can be helpful to anyone, let me introduce my blog, ECB-Watch. It started off as a blog about the under reported controversy at the nomination of the ECB President. Is has a well documented timeline on the issue. Closely related,  “EU’s selective lessons of Greece” looks into hearings and an audit, revealing a possible web of deception. A summary and consequences is provided in “EU rewards Goldman Sachs for debt scheme”.

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