On September 6, 2012, the President of the ECB, Mario Draghi, announced that the ECB "will do whatever it takes […] to preserve the euro" (Draghi, 2012b). Due to the unfavorable economic situation and the emerging fear of an involuntary break-up of the Eurozone, the Governing Council decided to launch the OMTs program that would allow the ECB to buy unlimited government bonds from countries of the Eurozone on the secondary market. This announcement led to a subject of considerable political debate across the world. It is with this background in mind that the research question arises: Did the European Central Bank exceed its mandate by announcing the bond-buying program, outright monetary transactions (OMTs)? This paper will show that the principals’ preferences heterogeneity with regard to different crisis solution approaches changes when it comes to the survival of the Eurozone. Thus, the agent was given more discretion to do everything to defend the Euro as a common goal. The aim of this contribution is to answer the research question from a principal-agent perspective, not to provide a jurisprudential or economic analysis of the issue. Therefore, the decision of the German Federal Constitution Court will not be included in the following work. The remainder of this paper is organized as follows: The first part gives a brief introduction to the main assumptions of the PA approach. The next chapter discusses the ECB as an institution, together with the framework and the design of its mandate to consider the level of autonomy of the ECB and which gaps in the policy-making authority could occur. The third part outlines the technical features of the announced OMTs program to see if the bond-buying program is in accordance with the mandate. Then, the debate on this program from a PA perspective becomes the focus. The final chapter summarizes the paper.
Table of Contents
1. INTRODUCTION
2. THE PRINCIPAL-AGENT APPROACH
3. THE EUROPEAN CENTRAL BANK
4. THE OUTRIGHT MONETARY TRANSACTIONS PROGRAM
5. THE DEBATE FROM A PRINCIPAL-AGENT PERSPECTIVE
5.1 THE PREFERENCES OF THE AGENT – ECB
5.2 THE PREFERENCES OF THE PRINCIPALS – MEMBER STATES OF THE EUROZONE
5.3 DID THE ECB EXCEED ITS MANDATE BY ANNOUNCING OMTS PROGRAM?
6. CONCLUSION
Research Objectives and Key Topics
This thesis examines the delegation mandate of the European Central Bank (ECB) during the Euro-crisis using a principal-agent (PA) analysis to determine whether the ECB exceeded its mandate by introducing the Outright Monetary Transactions (OMT) program.
- Application of Principal-Agent theory to European Union institutions.
- Analysis of the institutional design and independence of the European Central Bank.
- Examination of the conflicting preferences between the ECB and Eurozone member states.
- Evaluation of the legal and political legitimacy of the OMT program within the EU mandate.
Excerpt from the Book
2. The Principal-Agent Approach
Before moving forward to the debate it is useful to outline the main aspects of the PA approach, which developed to a well-used theory within EU studies (Maher et al., 2009: 410).
The PA approach describes the relationship that occurs when a principal delegates power to an agent who then works on behalf of the principal on its own responsibility with an agreed upon discretion in a certain spectrum of tasks. A principal can be defined as a “political official who use[s] his authority to establish non-majoritarian institutions through a public act of delegation” and “agents are those who govern by exercising delegated powers” (Thatcher and Stone Sweet, 2002: 3-4). Both parties are bound by a contract and it is possible for the principal to determine this relationship at any time (Kassim and Menon, 2003).
The primary reason why principals delegate is to reduce transaction costs (Hawkins et al., 2006: 168). There are four strands of explication that define those transaction costs: First, the principal expects the agent to contribute with their knowledge to specific problems, while the principal reserves the right for the policy-making power. The estimated effect would be an increase in effectiveness and efficiency of the policy or the law making procedure (Wonka, 2008: 50; Thatcher and Stone, 2002: 4; Kassim and Menon, 2003: 123). Second, by delegating power, the principal stabilizes his own politics because he is bound to certain rules in the future (Wonka, 2008: 50) which lends him credibility (Thatcher and Stone, 2002: 4) and he can create a “lock-in-effect” to freeze a certain power constellation (Hawkins et al., 2006: 19). Third, the principal wants to overcome information asymmetries by taking advantage of the agent's expertise to produce suitable policy (Thatcher and Stone, 2002: 4). Fourth, sometimes unpopular decisions must be made and the agent can be presented to the public as the responsible party in order to take the blame (Thatcher and Stone Sweet: 2002: 4).
Chapter Summaries
1. INTRODUCTION: Outlines the emergence of the Euro-crisis, the controversial introduction of the OMT program, and defines the central research question regarding the ECB's mandate.
2. THE PRINCIPAL-AGENT APPROACH: Provides the theoretical framework for analyzing delegation, transaction costs, and control mechanisms between principals and agents.
3. THE EUROPEAN CENTRAL BANK: Details the institutional design of the ECB, emphasizing its high degree of independence and its specific, rule-based mandate.
4. THE OUTRIGHT MONETARY TRANSACTIONS PROGRAM: Explains the technical features of the OMT program and the conditions under which the ECB can purchase government bonds.
5. THE DEBATE FROM A PRINCIPAL-AGENT PERSPECTIVE: Analyzes the conflicting interests of the ECB as an agent and the Eurozone member states as principals, and evaluates whether the OMT exceeded the ECB's authority.
6. CONCLUSION: Synthesizes the findings, confirming that the ECB operated within a discretion-based mandate to resolve the crisis as requested by its principals.
Keywords
European Central Bank, Euro-crisis, Principal-Agent Approach, Outright Monetary Transactions, OMT, Monetary Policy, Delegation, Institutional Design, Eurozone, Price Stability, European Integration, Political Independence, Economic Governance, Mandate, Crisis Management.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis focuses on the relationship between the European Central Bank (the agent) and the Eurozone member states (the principals) during the height of the Euro-crisis, specifically examining the legality and political implications of the OMT bond-buying program.
What are the central themes of the work?
The main themes include delegation in international organizations, central bank independence, the institutional architecture of the Eurozone, and the tension between national sovereignty and supranational monetary policy.
What is the primary research question?
The research asks: Did the European Central Bank exceed its mandate by announcing the bond-buying program, known as Outright Monetary Transactions (OMT)?
Which methodology is applied?
The author employs a Principal-Agent (PA) framework, a branch of rational choice institutionalism, to evaluate the interaction between the ECB and the member states and to identify potential gaps in the ECB's mandate.
What does the main part of the work cover?
The main part covers the theoretical PA foundation, the specific institutional design of the ECB as described in EU treaties, technical details of the OMT, and a comparative analysis of member state preferences during the crisis.
Which keywords best describe the paper?
Key terms include European Central Bank, Euro-crisis, Principal-Agent Approach, OMT, Monetary Policy, Delegation, and Institutional Design.
How did member states differ in their view of the OMT?
The paper identifies two groups: countries with low debt and high creditworthiness (e.g., Germany) that favored austerity, and highly indebted nations that supported central bank intervention to ensure liquidity and market stability.
Does the author conclude that the ECB exceeded its mandate?
No, the author concludes that the ECB did not exceed its mandate, arguing that the ECB acted within a discretion-based mandate to fulfill the top priority of the principals: safeguarding the euro.
- Quote paper
- Tony Müller (Author), 2014, The Delegation Mandate of the European Central Bank during the Euro-Crisis, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/277592
