As I was trying to explain quantitative easing – again – to an analyst this morning, a rather odd thought occurred to me. The fallout from the Chancellor’s smash-and-grab on the Bank of England’s quantitative easing (QE) program has continued, with many economists pointing out that the Treasury has now damaged the independence and credibility of the Old Lady. But could there potentially be a bigger concern: in particular, might George Osborne have just broken European law?
When the single currency was established, and the Maastricht and subsequently Lisbon treaties were laid down, politicians were generally in agreement about one particular thing. Most countries were envious of the Bundesbank’s policymaking formula, and readily signed up to one of its key credos – that it is illegal for central banks to directly finance governments, whether they are in the euro or not.
In the appropriate protocol to the Lisbon treaty, the relevant text is as follows:
‘Overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of … central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.’
The BoE got around the last clause – the purchase of debt instruments – right at the start of its QE programme. Instead of buying bonds from the government, the BoE lets the UK debt office sell the bonds to private sector investors first. It waits about two weeks. And then it can buy the bonds from the same investors that the debt office sold them to. Two weeks is all it takes, apparently. There are many recorded instances of investors buying UK government bonds at auctions, waiting that time, and then selling them straight back to the BoE, making easy money.
The grab on the QE profits (the passing of Gilt coupons from the BoE back to the Treasury) is certainly not bond buying, so that is fine. But it can easily be argued that it is a form of credit facility. By pinching the money from the BoE now, the Treasury knows that it will eventually have to refund the BoE – ie, put the money back. That sounds a lot like temporarily borrowing money to me – using the funds to lower the amount of debt the government has to issue now, at the same time as raising future borrowing requirements and issuance levels to pay the BoE back. The fact that this arrangement has not been formalised doesn’t matter – if I borrow Â£20 from my friend, that is still a credit facility, albeit a very small one.
This raises an intriguing prospect – has George Osborne just broken European law? To be fair, I am not a lawyer, so I don’t know. But at the very least I suspect someone could cause a lot of hassle by trying to get to the bottom of this.
Fortunately, the UK is not quite Germany – there is no constitutional court where angry academic professors can bring lawsuits against the central bank or the Treasury. But, under European law, someone could bring a case against the UK to the European Court of Justice, on the grounds set out above. We would probably question the motives for doing so, and bemoan the lack of understanding about the UK’s particular circumstances (we need the BoE to buy gilts so no one else has to!). But European law is not an emotional or – unless explicitly stated – country-specific beast. Osborne could be sailing very close to the wind.