The ECB s Battle against Central Banking

Its monetary policy cannot be perfectly suited to all members needs all of the time. For the euro s first ten years, the ECB s policy was too lax for Spain now it is too lax for Germany.

The European Central Bank provides an interesting analogy, because it has two voting procedures, depending on the issue at hand. The ECB s Governing Council comprises the six members of the Executive Board plus the governors presidents of the 16 national central banks of the eurozone countries.

Ecb Is Now Europe s Anchor

But, for the ECB's plan to work, its QE must be robust and that will require broad support. After all, eurozone monetary policy is the product of joint decision making within the ECB governing council, where Germany's influence is strong.

Capturing the ECB

European Central Bank (ECB)

Central bankers in Europe have always resented the narrow monetary policy mandate given to the ECB under the Maastricht Treaty. Banking supervision was not included among the ECB s objectives, though one article of the treaty gives the system of European central banks as a whole the task of contributing to effective supervision.

The ECB Grows Up

Europe s economy remains shackled by three problems sovereign debt, the euro, and wobbly banks despite several new policy backstops the European Stability Mechanism (ESM) the European Central Bank s easy money policies and holdings of sovereign debt and the ECB s takeover in November of supervision of the 130 or so largest pan eurozone banks. None of these reforms has been sufficient to restore the stronger growth that Europe desperately needs.

But this will require a shift in the ECB s attitude. Europe needs a monetary policy that views aiding employment growth in northern Europe as more important than continental price stability.

Jean Claude Trichet, the current ECB president, may be in the same job but not the same environment as his predecessor Wim Duisenberg, who famously remarked, I hear the politicians, but I don t listen. Political pressure on the ECB today is much greater than in Duisenberg s time.

Is the ECB Doing Enough?

The ECB s Leap into the Unknown

The ECB Picks Up The Pace

ECB President Mario Draghi has said much the same. Indeed, the upcoming summit is missing an important agenda item a European Fiscal Authority (EFA) that, in partnership with the ECB, could do what the ECB cannot do on its own.

NEW YORK The European Central Bank has finally launched a policy of quantitative easing (QE). The key question at this stage is whether Germany will give the ECB the freedom of maneuver needed to carry out this monetary expansion with sufficient boldness.

Who Next at the ECB Helm?

It will not do ECB credibility any good if takes an economic collapse to convince it that the coast is clear on the inflation front. The ECB is not the old Bundesbank, which had such public support and trust in Germany that it could get away with almost anything.

In January, it fully adopted QE. Indeed, by now the Fed, the Bank of England, the Bank of Japan, the ECB, and a variety of smaller advanced economies central banks, such as the Swiss National Bank, have all relied on such unconventional policies.

Ironically, the October meeting of the ECB s Governing Council will take place in Paris this year. French politicians have been the most aggressive in putting political pressure on the ECB to relax its interest rate normalization policy.

The ECB s Faulty Weapon

The ECB s Tone Deaf President

The honeymoon for the European Central Bank is over. Because European interest rates no longer are clearly out of whack with the fundamentals of the euro zone economy, monetary policy has become more complex.

But any clear division of tasks and responsibilities between governments and central banks has, it seems, been jettisoned. Government action in many problem countries ultimately ends in finger pointing Europe, the ECB, and Germany, with its (relatively) responsible policy, have all been scapegoats.

Furthermore, and contrary to common belief, the ECB president need not be very diplomatic, but should be able to unite all members of the ECB s Governing Council. As political pressure on central banks, including the ECB, increases, its president must not hesitate to criticize European politicians and, if necessary, publicly name and shame them.

Helping the ECB Cross the Rubicon

The ECB and Its Critics

The ECB s Honeymoon is Over

Thus, it is clear how the losses incurred by the ECB s de facto regional fiscal policy are to be avoided the write off costs will be transferred from the ECB to the ESM. This makes no difference to taxpayers, who will have to pay for both institutions losses in the same manner.

The broader and more worrying trend is the politicization of central banking. Leading German political figures are becoming increasingly suspicious of the European Central Bank, while also worrying aloud about the US Federal Reserve s monetary policy.

While such a move is out of the question it would require a change in the European Treaty the noise is unhealthy. It distracts the ECB, adds to the impression that Europe is bad, and, more importantly, will be used by ineffective governments as a scapegoat for their failings.

The ECB s Path Not Taken

Germany s Case Against the ECB

The ECB defined price stability to be annual inflation of less than but close to 2 . Given the structure of the European Monetary Union, there is no government oversight of the ECB, which thus has both target independence and instrument independence, though restrictions preclude specific policies.

The rise to power of a rejectionist European government that is, one that unilaterally rejects the policy status quo would immediately bring the crisis to a head. A Greek government that summarily rejected conditions set by the EU and the International Monetary Fund would immediately be cut off by the ECB and forced to exit the euro.

Europe s Conscience Police

European Central Bank President Mario Draghi s announcement last summer that the ECB would do whatever it takes to preserve the euro reassured financial markets. But, as pressure from financial markets has eased, so has European leaders incentive to address problems with the eurozone s underlying economic and political dynamics.

Frankfurt is a divided city, policy wise the Bundesbank opposes quantitative easing and negative policy rates, while the European Central Bank is ready to do more. But Germany s thrifty savers households, banks, and insurance companies are furious about ECB policies that tax them (and others in the eurozone core) to subsidize the eurozone periphery s alleged reckless spenders and debtors.

Such differences were a highly complicating factor for the newly established European Central Bank (ECB), which had to determine the appropriate interest rate for all members (the so called one size fits all policy). The larger the differences have become during the euro s first decade, the more the ECB s policy could be described as one size fits none.

At the time, many leaders seemed to think that the ECB's move would be enough Announcement made, money printed, economies back on track. Unfortunately, that is not how monetary policy works QE will not be enough, and no one should be naive about that.

CAMBRIDGE The European Central Bank is moving, hesitantly but ineluctably, toward quantitative easing. The threat of deflation and the ineffectiveness of its previous measures leaves it no choice.

Europe s Foreign Policy Resilience

Only the European Central Bank could implement true socialization of national debt in the eurozone. But EU law expressly forbids any form of ECB financing of deficits.

Speaking on July 26, European Central Bank President Mario Draghi announced that the ECB was ready to do whatever it takes to preserve the euro Believe me, he said, it will be enough. The meaning of these words became clear with the subsequent announcement of the ECB s outright monetary transactions (OMT) scheme, under which it would purchase short term government bonds issued by countries benefiting from the European rescue fund s conditional support.