Dos and Don’ts for the European Central Bank

CAMBRIDGE – Recent statements by European Central Bank President Mario Draghi and Bank Governor Ewald Nowotny have reopened the debate about the desirable limits to ECB policy. The issue is not just the ECB’s legal authority under the Maastricht Treaty, but, more importantly, the appropriateness of alternative measures.

Nowotny, the president of the National Bank of Austria, suggested that the European Stability Mechanism (ESM) might (if the German Constitutional Court allows it to come into existence) be given a banking license, which would allow it to borrow from the ECB and greatly expand its ability to purchase eurozone sovereign bonds. Draghi later declared that the ECB can and will do whatever is necessary to prevent high sovereign-risk premia from “hampering the functioning of monetary policy.”