The Sovereign Central Bank

Mario Draghi is the most powerful banker in the history of the world

By WALTER RUSSELL MEAD

The European Central Bank has crossed a new frontier. Judging by the events of the last two days, it isn’t just independent. It’s sovereign.

It is certainly more sovereign than countries like Spain, Portugal and Greece. These countries will now stay afloat if their economic policies meet the approval of a majority of the members of the ECB board.

The ECB has become a new kind of central bank with a new kind of transnational power less because it is ambitious than because Europe is crippled. The European Union is home to a bewildering array of institutions. There is a European Parliament, a European Commission, a Council of Europe and a Court of Justice. Europe has a president and a (sort of) foreign minister.

Some EU institutions are capable and strong: its legislative and regulatory institutions generally are pretty effective at what they do. The European Union has no shortage of either regulations or laws, and companies like Microsoft and Google have developed a healthy respect for the ability of European regulators to enforce their decisions and police the EU market.

But the European Union is still much more of a club than a country, and its weakest institutions are part of what Americans call the executive branch. The EU’s president and its foreign minister can talk but they cannot really act and very few people inside or outside Europe remember who holds these posts—or perhaps even know that the posts exist. During the gravest crisis in the history of the Union, the EU executive officials have been almost completely irrelevant, and what political impact “Europe” has had on the unfolding crisis has come from individual commissioners rather than from Herman van Rompuy or Catherine Ashton. The worse and more urgent Europe’s problems get, the less visible these two officials become.

Nothing could be a greater demonstration of the inadequacy of the European constitutional process that anti-climaxed with the ratification of the Treaty of Lisbon. A decade of hard work by a constitutional process that compared itself to the US constitutional convention in 18th century Philadelphia brought forth a European leadership which is almost entirely invisible as the Union struggles for its future. It is hard to fail more grandly at constitution making than Europe has done.

Obviously, Europe is not very good at currency policy either; the euro is easily the biggest and most expensive policy mistake by any major political body since Mao launched the Cultural Revolution. But amid the disaster of bad ideas clumsily applied that is today’s currency union, Europe did manage to create one institution. It has a central bank.

This central bank is the only European body that can act. And as the only real actor in a continent in crisis, as the emergency deepens, its powers grow. National governments bluster; the European parliament wrings its hands. President Rompuy and Lady Ashton do whatever it is that they do wherever it is that they do it; but the ECB acts. Its governing board debates, a majority votes, and then it does whatever it thinks it must do.

This is how you can tell where, in a mixed government, the true power of sovereignty resides. The power of a sovereign expands to meet necessity; constitutions are not suicide pacts and the element of a government that does what is necessary for the survival of the state is the true center of power. In great emergencies in the United States, the President becomes a virtual dictator and the checks on his power (temporarily) disappear. When Bo Xilai shook China, the informal power networks behind the formal institutions stepped in and reached a decision. And as Europe’s crisis has become more acute, the ECB has eclipsed all of the councils, commissions, parliaments, prime ministers and chancellors in which Europe is so rich.

Even Angela Merkel has bowed to the power of the ECB. Germany has vowed from the start of the crisis to the present day that it will not stand behind the debts of countries over whose policies Germany has no say. The ECB has serenely ignored the demands of Europe’s most powerful country and committed Germany’s credit to the debts of Club Med without any limit discernible to the naked eye.

What gives a sovereign its power is the necessity of the case. People submit and even cooperate because the clear alternative is disaster. It was “follow Lincoln” or let the union fail. It was give Churchill whatever he wanted or watch the Nazis march up Oxford Street. And it is let the ECB do what it will or watch the European economy and the union with it fall apart.

It is the weakness of Europe’s other institutions that combines with the urgency of the crisis to give the ECB its power. And it is by no means clear how long the Bank can hold its place. The power on which it relies is its power to guarantee debt and to bail governments out. If the world loses faith in the ECB’s paper, its ability to act disappears.

This is a weak reed to support something as large as the European Union; ultimately if Europe is to survive as something more consequential than a club, it will have to vest sovereignty in something with more competencies and a broader base than the board of directors of a bank.

But Europe’s process of constitutional development remains crippled—or, to view things as charitably as possible, the process of political integration continues to move at a much slower pace than economic realities demand. This is fundamentally because the peoples of Europe are very far from deciding that they want to build a single multinational state. Constitutional processes and conventions aimed at building a stronger Europe produce weak and incoherent institutions because Europeans only sort of want to build Europe.

The sovereign central bank can at most provide a temporary solution to the crisis of Europe. The ECB can paper over the cracks and it can stave off insolvency among Club Med governments and the European financial system more generally for a time, but it lacks the competencies necessary to achieve more or to sustain the rescue for an indefinite period of time. It can buy time for Europe but it cannot substitute for the creation of a true European government that can do things like tax people and raise armies.

It is still very much an open question whether Europe can achieve that kind of political integration, or whether it wants to. The big news on that front comes these days out of Germany, where the ECB decisions are deeply unpopular. German support for transferring more powers to the European level has collapsed. The engine of European integration has gone into reverse.

Whether this is a temporary shift in German sentiment or a more permanent change is hard to read. And in any case, German elites in the past have been very good at pushing toward deeper union in the teeth of public opinion. But those who reluctantly accepted the euro because their leaders told them this was necessary to be “good Europeans” may not be willing to make another sacrifice now that the euro has been such a disaster. And the “Berlin Republic” looks a little more nationalistic and less European than the “Bonn Republic” when Germany was still divided.

People used to say that Prussia was an army with a state. Right now, Europe is a bank without one. This cannot last; Europe will lose its central bank or build a state. For now, however, Via Meadia salutes the first central bank in the world to achieve sovereign power. Mario Draghi is the most powerful banker in the history of the world.