More soul-searching at the ECB...
http://www.nytimes.com/2010/05/31/business/global/31deflation.html
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3 years ago
30 May 2010
10 May 2010
Banking on Europe - the ECB's Uncharted Waters
Just in time for the 50th post of this less-than-illustrious blog, the Greek debt crisis reaches a fever pitch and her European neighbors step in to save the day.
Late Sunday various leaders and finance ministers in the European Union and Eurozone as well as the International Monetary Fund announced the creation of an almost $1 billion fund to aid indebted countries in Europe, calming markets and soothing nervous politicians - especially German Chancellor Angela Merkel, whose delicate tightrope walk in leading Europe through troubled economic times has already cost her party in the polls in a recent regional election.
In the elastic thinker's view, while this move was a necessity in the short run to sustain the euro currency zone and calm market fears, it undermined a major institutional strength of the European Union: its autonomy on matters of regional economic policy.
The European Central Bank is widely praised as one of the world's most independent central banks, conducting monetary policy strictly on a singular objective of keeping inflation close to a target range and harmonizing economic growth throughout the currency zone with zero regard for political pressures in individual countries to keep interest rates high or low or to finance government debt. As a result of its independence, it cannot serve as a lender of last resort to Eurozone members like Greece that forgo their responsibilities to keep public spending and debt, and ultimately inflation, under certain levels to prevent a misalignment in the exchange rate parities that keep the European Exchange Rate Mechanism functional.
Instead, with the creation of this fund, albeit necessary, Europe has decided to make the ECB more of an activist monetary authority without explicitly calling it that. By creating a separate "fund," there will be an appearance that a separate body, not the ECB, will be stepping in and rewarding bad behavior by bailing out profligate spenders in the eurozone - when in fact the ECB has already started purchasing bonds to inject money into the banking system. It may continue to be statutorily independent, however it will undoubtedly have no choice but to support any move to bail out countries because such bailouts will ultimately have monetary implications that will influence future interest-rate policy.
By sacrificing the ECB's independence in the short run, the European authorities have mortgaged away the biggest strength of its currency. This will hurt the value of the euro in the long run and undermine the currency's prospect of rivaling the U.S. dollar as the world's reserve currency.
It will be interesting to see how these uncharted waters for the ECB and other EU economic policy-making bodies will evolve during this key test of Europe's institutional unity.
Late Sunday various leaders and finance ministers in the European Union and Eurozone as well as the International Monetary Fund announced the creation of an almost $1 billion fund to aid indebted countries in Europe, calming markets and soothing nervous politicians - especially German Chancellor Angela Merkel, whose delicate tightrope walk in leading Europe through troubled economic times has already cost her party in the polls in a recent regional election.
In the elastic thinker's view, while this move was a necessity in the short run to sustain the euro currency zone and calm market fears, it undermined a major institutional strength of the European Union: its autonomy on matters of regional economic policy.
The European Central Bank is widely praised as one of the world's most independent central banks, conducting monetary policy strictly on a singular objective of keeping inflation close to a target range and harmonizing economic growth throughout the currency zone with zero regard for political pressures in individual countries to keep interest rates high or low or to finance government debt. As a result of its independence, it cannot serve as a lender of last resort to Eurozone members like Greece that forgo their responsibilities to keep public spending and debt, and ultimately inflation, under certain levels to prevent a misalignment in the exchange rate parities that keep the European Exchange Rate Mechanism functional.
Instead, with the creation of this fund, albeit necessary, Europe has decided to make the ECB more of an activist monetary authority without explicitly calling it that. By creating a separate "fund," there will be an appearance that a separate body, not the ECB, will be stepping in and rewarding bad behavior by bailing out profligate spenders in the eurozone - when in fact the ECB has already started purchasing bonds to inject money into the banking system. It may continue to be statutorily independent, however it will undoubtedly have no choice but to support any move to bail out countries because such bailouts will ultimately have monetary implications that will influence future interest-rate policy.
By sacrificing the ECB's independence in the short run, the European authorities have mortgaged away the biggest strength of its currency. This will hurt the value of the euro in the long run and undermine the currency's prospect of rivaling the U.S. dollar as the world's reserve currency.
It will be interesting to see how these uncharted waters for the ECB and other EU economic policy-making bodies will evolve during this key test of Europe's institutional unity.
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