This week, the ECB decided to stop accepting Greek junk debt as collateral in return for funding Greek banks. Viewed from Frankfurt, the SYRIZA government’s promise to renegotiate Greece’s bailout deal means the funding arrangement is off – the ECB’s decision to bend its rules to accept Greek junk debt in the first place was always predicated on the country sticking to reforms agreed under the bailout (details here). Immediately, the Twittersphere was flooded with accusations of the ECB’s ‘shameless’ and ‘politically-motivated’ timing.

A poor man’s Bundesbank?

“Not all Germans believe in God, but all Germans believe in the Bundesbank”, Jacques Delors famously said. To mould the ECB in the exact image of the Bundesbank – a politically independent guardian of sound money – was an absolute prerequisite for the Germans giving up the D-Mark. Strict rules were put into place to make sure the ECB never threw its good money after others’ bad. It was given one mission: price stability. The ECB was to be apolitical.

Then the Eurozone crisis hit, and with the lack of a political governance structure of the Eurozone, the ECB was thrown into politics. A few examples:

62% of Germans say they oppose the European Central Bank easing its focus on maintaining price stability, even if it was deemed beneficial for the Eurozone as a whole. Only 25% Germans would back such a move. Source: YouGovDeutschland for Open Europe & Open Europe Berlin

Remember “price stability”?

  • In May 2010, under massive political pressure and Greece on the brink, the ECB decided to start buying government bonds – via the SMP. This triggered an outcry in Germany as the ECB’s rules prohibit it from financing governments. Since it was done on the secondary market, the ECB said it was legal.
  • In 2010, ECB President Jean-Claude Trichet sent a letter to the Irish government threatening to cut off emergency funding (ELA) unless Dublin applied for a bailout.
  • In 2011, the ECB sent a list of policies the Italian government should implement – including front-loading austerity, pension reforms and constitutional changes – as a precondition for the ECB starting to buy Italian bonds.
  • In 2011, the ECB sent a similar wishlist to former Spanish Socialist Prime Minister Zapatero.
  • In 2012, amid political fumbling, ECB President Mario Draghi announced the OMT – the legality of which the German Constitutional Court has since questioned.
  • Foreshadowing what might happen in Greece, in 2013, the ECB threatened to cut ELA to Cyprus if it didn’t agree to the bailout.
  • In a remarkable coincidence, the ECB changed its collateral rules just in time to help Portugal return to the markets after its bailout last year.
  • In 2014, the ECB intervened to reheat the market in asset-backed securities and then, of course, this year decided to launch QE – under monumental political pressure.

Grexit: no decision for a central bank

Irrespective of whether the individual decisions were right or wrong, the ECB has stretched its original mandate to the breaking point and done more than anyone could have expected of it during the crisis.

To suddenly complain about the ECB playing politics with Greece is odd. Not least since the original 2010 decision to give Greek banks a waiver was itself a political move, which in some ways Frankfurt is now setting straight. Only a few months before, then ECB President Jean-Claude Trichet had vowed that:

The Central bank will not change its principles just because the sovereign bonds of a member state no longer fulfill the appropriate criteria.

Jean-Claude Trichet, ECB President (2003-11), 2010

We can argue about whether Draghi should have stuck to the original end of month deadline. But by (partially) pulling the plug on funding for Greece banks now, the ECB has actually done what an independent central bank should do: handed over a hugely political decision – Greece’s future inside the Eurozone – to politicians.