Has Euro Area Monetary Policy Become Redistribution by Monetary Means? ‘Unconventional’ Monetary Policy as a Hidden Transfer Mechanism

• DOI: http://doi.org/10.1111/eulj.12222
• Published date: 01 November 2016
• Author: Klaus Tuori
• Date: 01 November 2016

Has Euro Area Monetary Policy Become

Redistribution by Monetary Means?

‘Unconventional’Monetary Policy as a

Hidden Transfer Mechanism

Klaus Tuori*

Abstract: This article takes an unconventional perspective on Eurosystem monetary policy

by asking whatkind of redistributive effectsit might have had. Any monetary policycan have

redistributive effects as it alters the environment in which economic agents, households and

companies, operate. Some benefit and somestand to lose from decisions by the central bank.

However, monetary policy generally does not aim at redistributive implications; indeed, in

the Euro area context it does not have a mandat e to do so. Against this background it is

not irrelevant how the large number of Eurosystem monetary policy measures during crises

should be assessed. The a rticle claims that in par ticular the government bond purchase

programmes by the Eurosyst em and massive liquidity sup port to banks could have had

redistributive eleme nts even in a prominent role. T he Eurosystem has become th e final

guarantor of Member States in trouble and their banking sectors, even reinforcing the link

between the two. This focus has potentially pushed the Eurosystem to neglect its primary

objective but also its broader implications f or the Euro area economy and societies more

generally.

I Introduction

It is no secret that,since 2007, the European systemof central banks (the Eurosystem)has

taken a number of ‘unconventional’monet ary policy measures, inc luding large-scale

acquisition of sovereign bonds of Euro areacountries in secondary markets. Lessnoticed,

but equally relevant, is t hat the Eurosystem has at the sa me time made extensive

‘unconventional’use of some partsof its standard operational framework. This is the case

with the massive and long-term refinancing operations of 2011 and 2012, through which

€1 trillion were injected into the Euro area financial system.

In this article, I consider whether ‘unconventional’monetary policy, as designed and

implemented by the Eurosystem, has or has not pushed the Eurosystem to act beyond

its powers and to go beyond what its mandate requires, and in the process potentially

compromised its independence, vis-à-vis both Member States and financial institutions.

In particular, I will consider whether some of these policies have resulted in hidden

transfers, either to Member States or in favour of particular actors within the financial

sector. In each and every oc casion on which it acts, the Eurosystem produces

arguments to justify the dec isions involved. From a sta ndpoint internal to the

reasoning of the argument, these claims seem persuasive enough. However, the more

* University of Helsinki.The author wishes to thank DanielP. Wyatt for his research assistance.

European La w Journal, Vol. 22, No. 6 , November 2016, pp. 8 38–868.

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the measures deviate from t he well-designed and thor oughly analysed standa rd

monetary policy ‘template’, in brief, the more ‘unconventional’monetary policies

become, the stronger the reasons to assess the measures from a perspective broader

and more comprehensive than that used by the Eurosystem itself. For those and other

related reasons, it seems pertinent and necessary to consider whether the arguments put

forward by the Eurosystem are persuasive enough, or, on the contrary, whether good

reasons exist to conclude that the Eurosystem has acted either beyond its powers (ultra

vires)orin a way contrary to what its independence requires, or both. That in a nutshell

is the very purpose of this article: to determine whether the line of reasoning of the

European Central Bank (ECB) holds when tested aga inst this set of comprehensive

arguments.

The article isstructured in three parts. In thefirst part, I present a concise descriptionof

the history and policy too ls of the Eurosystem, wit h a view to providing reader s less

familiar with European cen tral banking with the back ground knowledge necessa ry to

make sense of thesubsequent parts of the argumentation. In the second part,I reconstruct

Eurosystem monetary policy since 2007and evaluate its distributive consequences, and in

particular the potential distributive effects of: (1) the issuance of banknotes; (2) the

provision of liquidity to financial institutions; (3) the payment system of the Euro area,

the so-called ‘TARGET2’; (4) the provision of emergency liquidity assistance to financial

institutions(and in actual practice, to nationalfinancial systems); and (5) theacquisition of

sovereign bonds. The thi rd part holds the conclusi ons, where I consider what t he

distributive implications of Eur osystem policy tell us about what kind of centra l bank

the EuropeanCentral Bank actually is, andwhat kind of community of debt theEuro area

has come to be through the decisions and reforms taken in the name of containing and

overcoming the crises.

II The Eurosystem

A Composite, Quasi-Federal Structure

The Eurosystem

1

is the Euro area central banking system. Despite the fact that most

public discussion and indeed a good deal of legal scholarship assumes that the

European Central Bank, wi th headquarters in Frankfu rt, effectively runs Euro pean

monetary policy, the fact of the matter is that the ECB is but the tip of a quasi-federal

central banking system, of which national central banks (NCBs) also form fundamental

parts.

Not only is the composite character of the Eurosystem closely related to the composite

character of the European Union as a whole, but also the quasi-federal design of the

Eurosystem results from a fundamental decision at the core of the constitutional design

of the Eurozone, namely the strict separation of national responsibilities for public debt

(the ‘wall of separation’between national exchequers, as codified in Article 125 TFEU).

As a result, NCBs have retaine d separate, independen t legal personality and

autonomous operative capacities regarding most if not all monetary policy operations

1

The Eurosystemconsists of the ECB and nationalcentral banks of the Euro areacountries. It is the preferred

term for Euroarea monetary policy function.It has the same decision-makingbody as the ECB, in the shape

of the Governing Council. This can create some confusion, as decisions of the Euros ystem are formally

decisions by the ECB.In this article, the Eurosystem is used unless theissue relates only to the ECB and not

the whole central banking function of the Euroarea.

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