OPINION:The ECB deal can probably be justified. But the drastic way it achieved it cannot

MUCH REMAINS unknown despite recent interviews with all the main players involved in Ireland’s EU-International Monetary Fund bailout that cast new light on the extraordinary events of last November. Among the many questions and concerns that linger are issues surrounding the way in which the European Central Bank (ECB) acted and its lack of accountability more generally.

Since the euro zone crisis erupted last year, the power of the ECB, and the manner in which it has wielded that power, has been striking. Although it was well-known it had taken a leading role in the sudden precipitation of the Irish bailout in November, none of the actors involved had been willing to say as much on the record until Brian Lenihan was interviewed for last Sunday’s BBC documentary, Bailout Boys Go to Dublin.

In that interview with me, he also spoke of the uncontrolled and damaging way members of the bank’s governing council briefed the media. He effectively accused a member of its executive board of not telling the truth. He spoke of his view that the bank had misdiagnosed Ireland’s economic problems and of the limited engagement it had with the Irish authorities on addressing those problems before the bailout. This led, among other things, to ill-thought-out measures being included in the package that were “unimplementable”.

If the things Lenihan had to say about the ECB are true – and many of them are almost certainly true – they raise serious and worrying questions about how the bank exercises its power and the very limited checks and balances to which it is subject. Such concerns have been heightened by the ECB’s central role – by most accounts – in the events leading up to Portugal’s recent bailout.

It is abundantly clear that the bank believes it should act quickly, decisively and without much consultation with other actors, including national governments, if it decides the wider European interest is best-protected by bringing countries into bailouts.

Can this by justified? The answer is a tentative Yes.

The crisis of the euro – ongoing for more than a year – has exposed weaknesses in both the institutional design of the currency and the wider EU, a construct not built for speed. The delays and indecision of the euro zone’s member states, between February and May last year in particular, created a vacuum.

It can be argued that because the zone’s political authorities would not act in a timely fashion to save the euro and prevent the meltdown of the continent’s banking system, the independent monetary authorities in Frankfurt had no choice but to fill the vacuum.

For the ECB to take drastic measures in an emergency situation is, then, justified.

But the manner it which has done so is not.

Neither member of the Fianna Fáil-Green Party cabinet interviewed for the programme – Lenihan nor Eamon Ryan – had been given any indication by the ECB that it was preparing to act before mid-November last year. One could imagine and justify such a stealthy approach by the ECB had the government proved itself to be an unreliable partner and unwilling to respond to reasonable requests for policy changes.

But, for all its many faults, the previous government was not deaf to suggestions from EU institutions, as evidenced by the major role played by those same institutions in pushing the 2011 budgetary adjustment to €6 billion.

Nor was it seen as obstructionist. For instance, many of those interviewed made a clear distinction between the Irish authorities and the untrusted Greek authorities.

Lenihan’s claims that the ECB did not take much interest in restructuring the Irish banking system before November ring true – there was no indication prior to that that the ECB was pushing for change. They ring truer again when one considers the terms of the bailout. It did not amount to a fully thought-through plan for bank restructuring that might have been expected had Frankfurt had its own plan and the only obstacle to implementing it was a stonewalling government in Dublin.

It also seems as if the ECB did not keep the European commissioner, Olli Rehn, informed of its intentions in the days prior to the initiation of the bailout.

He ended a visit to Dublin on the afternoon of Tuesday, November 9th. He gave no indication to anyone he met that, within 48 hours of his departure, the governing council of the ECB would decide on bringing Ireland into the bailout embrace.

There are two possibilities: Rehn knew what was happening in Frankfurt and withheld that knowledge from the Irish authorities for reasons unknown; or he was unaware of what was coming.

The commission has always maintained that it acted in tandem with the ECB at all times. If this is true, then Rehn acted duplicitously on his trip to Dublin on November 8-9th.

The balance of evidence does not support this. It seems much more likely that the commission was not aware of the ECB’s Thursday decision and now feels obliged to maintain that it did because not doing so would show how fragmented the EU institutional response is to the crisis.

The apparent willingness of the ECB to take action as drastic as insisting a sovereign state accept a bailout with so little consultation with anyone raises genuine concerns about the checks and balances to which this powerful institution of government in Europe is subject.

By international standards, the ECB is less accountable than most central banks in other democracies. Most notably, the European Parliament, based in Strasbourg, to which it is nominally accountable, does not have the power to enact legislation to alter its structures or mandate. This is the most important difference with its counterpart institution in other large, advanced democracies – such as the US, Japan, Britain and Canada.

In the US, for instance, an Act of congress could abolish the Federal Reserve. In Europe, only full-blown treaty change, involving agreement among 27 governments and ratification by 27 parliaments, can alter any major aspect of the bank.

This situation came about largely due to German insistence in the 1990s. It then feared that less inflation-averse countries in the euro area could pressure the new institution to take risks with price stability.

However understandable this position was, it has led to a very powerful but barely accountable locus of power. That is never a good thing.

Dan O’Brien is Economics Editor