Saturday, April 6, 2013

The ECB Is Not a Central Bank

. Saturday, April 6, 2013

The European Central Bank should no longer be considered a central bank. Instead, it is a negotiating arm of Germany and (to a lesser extent) France. It is not surprising that the ECB does not act as normal central banks act. Instead of comparing the ECB to the Fed or any other central bank, we should compare it to the IMF.

The ECB is one arm of the Troika, along with the European Commission and the IMF. As such, it is involved in the negotiations during which bailout funds are extended to the European periphery in exchange for structural reforms. If the ECB eases monetary policy, then these structural reforms become less necessary in the short run. Indeed, this is what everyone who opposes current ECB policy is saying.

Given that, the ECB is not going to ease. It cannot, as to do so would be to cut out the leverage the European Commission has in forcing structural reforms. And the European Commission believes that without structural reforms the eurozone cannot last (absent perpetual transfers from the core to the periphery). The ECB is influenced disproportionately by the core euro countries, especially Germany. If the ECB does not keep Germany on its side, then its authority is likely gone.

So the ECB is not a central bank, and should not be considered as such. The ECB is a "lender of last resort" in the same way the IMF is, which is the way Bagehot intended: in a crisis, lend at a penalty rate. The penalty is structural reform. But the ECB is no longer tasked with stabilizing the European economy. That is no longer its remit, nor its goal.


LKwesiJ said...

The ECB is disproportionately influenced by the core countries? That's why the Germans on the ECB either step back or are consistently outvoted I assume?

The ECB Is Not a Central Bank
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