ECB Rule Changes | Antti Ronkainen and Vesa Vihriälä | Negotiator 111

Summary

Vesa Vihriälä, professor of practice at the University of Helsinki, and the doctoral researcher Antti Ronkainen go through what is left of the euro area’s fiscal rules. The starting point is bleak: the sixty per cent debt limit has not restrained member states for a long time, and in Ronkainen’s account the three per cent deficit rule failed on both sides — the preventive arm did not stop over-indebtedness, and the corrective arm produced, during the euro crisis, a fiscal policy tight enough to cause a self-inflicted recession in 2011 and 2012. Both expect the numbers to survive and the loosening to happen through interpretation, which Vihriälä calls the worse option because it blurs the line between good and bad behaviour. The sharpest thread concerns the European Central Bank, which through creative reinterpretation became a lender of last resort to states; Ronkainen calls quantitative easing already a weak form of helicopter money, and Vihriälä argues that the euro area will not last without either a sovereign debt restructuring mechanism or centralised fiscal decision-making.

A rule that failed twice

The three per cent ceiling is usually criticised for being ignored. Ronkainen’s stronger case is that it failed in both of its functions: the preventive arm did not prevent debt from accumulating, and the corrective arm, when it was enforced during the euro crisis, forced a contraction — in 2011 and 2012 the euro area drifted into what he calls a self-inflicted recession, helped by premature ECB rate rises.

Numbers kept, rules loosened

Both guests expect the reform to keep the reference values and change the mechanisms. Vihriälä would rather see the limits changed openly and then followed; keeping the numbers while living around them in practice makes it hard to say what counts as good behaviour. Ronkainen sees the same pattern already at work in Germany’s accounting routes round its debt brake.

Lender of last resort by reinterpretation

The ECB arrived at that role through new instruments rather than any change to its mandate. The EU Court of Justice has since drawn limits — purchases by the capital key, no national central bank holding more than half of its country’s bonds, and yields that must be market-priced. Ronkainen calls quantitative easing already a weak form of helicopter money, because interest paid to the national central bank flows back to the state.

Restructuring or a fiscal centre

Vihriälä’s long-run condition is the episode’s clearest position: either sovereign debt can be restructured in an extreme case without endangering financial stability, or a central fiscal authority must be able to bind member states. Small steps — collective action clauses since 2013 and Germany’s stated aim of cutting banks’ sovereign exposure — point towards the first.

Watch

The recording lives on the Neuvottelija channel: EKP Sääntömuutokset | Antti Ronkainen Vesa Vihriälä | Neuvottelija 111. A Finnish edition of this episode is published at www.neuvottelija.fi.

In depth

The Neuvottelija AI editions carry a long-form write-up of this episode: English · suomeksi.