ECB President Christine Lagarde has reiterated the central bank’s cautious stance, but opposition is growing at the Russian frontier.
Cracks are appearing in the European Central Bank’s united front as the urgent need for cash to rearm Europe threatens to overpower legalistic and technocratic concerns about how the single currency should be managed.
The implicit withdrawal of American security guarantees from Europe last week following a heated Oval Office clash between U.S. President Donald Trump and Ukrainian President Volodomyr Zelenskyy has sent European leaders scrambling for ways to bolster defense spending quickly.
Largely strapped for cash and already groaning under heavy debt burdens, Europe’s politicians are now mulling whether to seize some €200 billion in Russian central bank reserves currently frozen in Belgium and being used as collateral for a €50 billion loan from the G7 to Ukraine.
Traditionally, the Frankfurt-based ECB has warned against any more aggressive action, saying it could damage the standing of the euro in global financial markets.
But on Friday, Mārtiņš Kazāks, governor of the Bank of Latvia, was the first member of the ECB’s Governing Council to endorse the move for outright seizure, telling POLITICO that it was a “viable option to help Ukraine in its fight for freedom and against aggression.”
The comments, conspicuously from a country on Europe’s front line with Russia, are an acknowledgement that more radical action is needed, even at the cost of sending yet another shock through global markets. They hint that rapidly shifting reality on the ground may force a new consensus in Frankfurt.
In addition to Kazāks, officials at other Baltic central banks also privately endorse outright seizure, even if their official position is different, said one person familiar with the matter. Neither the Estonian nor Lithuanian central banks responded to a request for comment.
In conversations with POLITICO, several Eurosystem officials — granted anonymity to discuss a sensitive matter freely — suggested that the shock of Trump’s abandonment of Europe had weakened their position, and reluctantly accepted that politicians would likely do as they pleased.
Changing realities
However, in public at least, ECB President Christine Lagarde is still trying to hold the line. In guarded comments on Thursday, the Frenchwoman as usual highlighted the legal risks of confiscation. But she acknowledged that the ECB’s role is merely advisory and that the decision is in the hands of governments.
“We have made our position quite clear,” Lagarde told reporters. “I would certainly submit that the international law basis on which any decision is made will matter as far as other investors are concerned, and I’m sure it’s another element that will be taken into account” by decision makers.
The ECB’s long-standing opposition is well-rooted in both law and tradition. Skeptics say that seizing the Russian funds would imply that assets held in Europe by other central banks are not safe, undermining faith in the single currency as a reserve currency and risking a loss of credibility, particularly among countries in the global south.
That would undo years of European efforts to try to build the euro up into an alternative to the dollar — just at the moment when the U.S.’s increasingly erratic behavior on the international stage is making the need for an alternative more urgent.
And it’s not just what the move would say about the euro, but what it would say about the eurozone as a place to do business. Judith Arnal, an associate research fellow at CEPS, said the move would also erode faith in the region’s clearing and settlement systems, which act as custodians not just for euro assets but also for dollar ones (including some held by China). Seizure, and the precedent it would set, could further isolate the EU at a time when the U.S. is aiming to reconcile with Russia, Arnal said.
“Without U.S. backing, the move could face greater international scrutiny, making it harder to justify and implement, while amplifying the risk of retaliatory measures from non-Western actors,” she said.
A harsher wind blows
But needs must when the devil drives, and the temptation to plunder one of the biggest cash piles on the planet is growing daily.
Harijs Rokpelnis, a top official in the Greens and Farmer’s Union, a member of Latvia’s ruling coalition, said the urgency of the moment requires that politicians ignore the ECB’s advice, however sound it may be.
“Looking from the purely technocratic view of economics, they have a point,” he acknowledged, while pushing for seizure nonetheless. The ECB, in turn, can maintain its technocratic position to save face, and both sides can agree to disagree, he added. Certain central bankers may privately agree with seizing the assets, said two other people, and are more than happy for politicians to go along with it.
Some argue the ECB has the tools to deal with any problems that seizure might cause. Elina Ribakova, an analyst with the Peterson Institute for International Economics in Washington, argued that the invocation of financial stability risks has typically been a euphemism for the dumping of eurozone government bonds by countries such as China or Saudi Arabia. But the ECB, she said, could counter this with its emergency bond-buying tool, known as the Transmission Protection Instrument, which exists explicitly to stop unjustified distortions in bond markets.
Tough choice
How politicians and central bankers resolve the issue will say a lot about the balance of power between the two, at a time when the traditional authority and independence of the ECB has been weakened by a prolonged overshoot of inflation.
Lagarde and the ECB’s body of experts in Frankfurt may yet prevail. The influence of regional central bank governors — who participate in monetary policy decisions but don’t have much say on Frankfurt’s institutional stance — is limited.
But the debate reveals how political concerns can chip away at its ability to defend the currency. It’s a particularly sensitive moment for the Eurosystem’s national governors, who are appointed by their respective governments. Six of the 20 on the ECB Governing Council have terms expiring this year. Those seeking reappointment, and candidates looking to succeed outgoing governors, may be more than usually unwilling to risk offending their capitals.
It isn’t that the ECB is allergic to getting involved in politics. The central bank has come under fire for its focus in recent years on climate change, as well as its forging ahead on the so-called digital euro, a pan-European payments platform that some see as de facto industrial policy.
But its first reflex — and its legal mandate — has always been to protect the value of the currency, and to shy away from anything that jeopardizes it.
“All in all, even if there is increasing political will to seize Russian sovereign assets, financial stability risks remain,” said Arnal at CEPS. “Political priorities do not change the substance of things.”
