Robbing Peter to pay Paul, EU style

  • The European Commission apparently wants to lay its hands on the ECB’s profits.
  • This is a bad and probably unworkable idea and is unlikely to happen.
  • It does highlight the EU’s post-Brexit money problem.

According to the Financial Times, the European Commission is considering appropriating the ECB’s profits in order to fill up the hole in the EU’s common budget opened as a result of Brexit. The motivation is not surprising: Britain is a net contributor to the EU budget. Brexit means that either other net contributors will have to contribute more – which they are not prepared to do – or net recipients will have to receive less – which they are not prepared to accept. Going to the bank is an easy decision, because, after all, “That’s where the money is” as Willie Sutton said.

Even so, this is a bad idea for a number of reasons.

First, as the FT notes, the ECB’s profits haven’t been that great recently, just below €1.2bn in 2016 and just below €1.3bn in 2017. The Commission is looking to generate some €56bn over seven years from this source, which seems highly unlikely.

Secondly, as the ECB has already pointed out, the move would almost certainly necessitate a legal change to the Bank’s statute – therefore, to be agreed by all euro area countries. Whatever governments will say, the idea is likely to be furiously resisted by the national central banks (NCBs), who cherish their independence and that of the ECB.

Thirdly, transferring funds from the ECB to the EU means taking money that under normal circumstances would be spent within the euro area (see below) and almost certainly spending the bulk of it outside the EA, since many of the EU’s poorest countries are in the Balkans and in Central and Eastern Europe and are not EA members. It is difficult to see that this would be tolerated by the various EA governments, who will therefore join the NCBs in resisting.

Fourthly, at the moment, the overwhelming majority ECB profits are distributed to the Bank’s owners, in other words, the NCBs. These usually pass on their profits to the respective Ministry of Finance, where it enters the general government budget and is spent domestically. If the European Commission really does manage to engineer its putative bank raid, it is essentially transferring funds from national governments to the EU, without having to go through the time-consuming and politically fraught process of getting everyone to agree to a larger EU budget.

Perhaps we should also ask ourselves, why is the idea even being discussed? One answer is that it highlights the European Commission’s desperation and need to somehow square the post-Brexit circle between those who won’t pay more and those who won’t take less. It may also be the case that this is a trial balloon; ECB profits are currently small; one or two billion euros won’t matter very much and is not worth kicking up a fuss about. But, of course, once the principle is agreed, it can be applied when profits are much higher.

But whether serious or a trial balloon (or a mixture), this is a bad idea, and one which is highly unlikely to come to pass.