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Published on May 31st, 2012 | by Katharina Obermeier
Image © [caption id="" align="alignnone" width="565" caption="The European Central Bank © saikofish"][/caption]   “The European Central Bank (ECB, based in Frankfurt, Germany) manages the euro.” The “How the EU Works” site helpfully informs those who didn’t already know. Indeed, in the minds of the public, the ECB has become inextricably melded with the euro and its problems, to the point where it is now commonly regarded as the institution responsible for the fate of the single currency. To opponents of European monetary union, the ECB has become the sinister powerhouse of shadowy banker-bureaucrats who are profiting from the euro at the expense of European citizens and/or national sovereignty. Yet to many of those who fear the collapse of the eurozone, it has the potential to save Europe and overcome the crisis. So what exactly has the ECB done so far in the crisis and what is it capable of doing? Its mandate is to keep prices stable, i.e. curb inflation, and to keep the financial system stable, i.e. mitigate external shocks and prevent the kind of instability caused by collapsing financial institutions. Its tools to achieving these tasks are primarily the setting of interest rates for the eurozone and open market operations. By increasing or decreasing interest rates, the ECB can counteract the traditional economic “boom-and-bust” cycle. Setting higher interest rates in boom times make it more difficult to borrow money and therefore help prevent unsustainable bubbles and setting lower interest rates help keep credit in the markets during times of economic contraction. The ECB’s main open market operations essentially consist of cash loans to the banks, which inject liquidity into the eurozone’s economy and help regulate the money supply. In response to the crisis, the ECB reduced interest rates to historic lows in an attempt to provide the eurozone with easier access to much-needed credit. More important, however, were its open market operations in the form of longer-term refinancing operations (LTROs), which, as economists have pointed out, have been crucial in preventing bank failures and reducing yields on government bonds in financially unstable countries such as Spain and Italy. Encouraged by these successes, some commenters are calling for more action by the ECB, arguing that it should essentially act as a guarantee for eurozone governments’ debts and participate more directly in buying these types of government bonds to further reduce the pressures of the financial markets. Unfortunately, they are operating on the premise mentioned earlier, the premise that the ECB is responsible for the euro – which is not actually true. While the Bank handles the day-to-day (and month-to-month) management of the single currency, the euro itself is, by its very nature as the joint currency for 17 different countries, the product of political decisions and its future course is dependent on them. As demonstrated above, the ECB undoubtedly has an essential role to play in the eurozone, but it would be wrong – and irresponsible – to hold its unelected Board accountable for the euro’s failure or success. While the Bank can devise and implement monetary policy, it can only operate within the framework set by EU leaders. It could not simply create the European Financial Stability Facility (the “firewall” which acts as a lender of last resort for eurozone countries in trouble), since its creation was a political decision by the governments of eurozone members and this type of lending facility has to be backed by member state guarantees. It is the democratically elected policymakers – the European Parliament, the Council and of course, national governments – who are responsible for the single currency. Only they can make the hard political decisions necessary to achieve the kind of fiscal integration that can keep the eurozone from falling apart. As appealing as the idea may seem to some, these choices cannot be outsourced to the European Central Bank.

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Can the European Central Bank save the Euro?

The European Central Bank © saikofish

 

“The European Central Bank (ECB, based in Frankfurt, Germany) manages the euro.”

The “How the EU Works” site helpfully informs those who didn’t already know. Indeed, in the minds of the public, the ECB has become inextricably melded with the euro and its problems, to the point where it is now commonly regarded as the institution responsible for the fate of the single currency. To opponents of European monetary union, the ECB has become the sinister powerhouse of shadowy banker-bureaucrats who are profiting from the euro at the expense of European citizens and/or national sovereignty. Yet to many of those who fear the collapse of the eurozone, it has the potential to save Europe and overcome the crisis.

So what exactly has the ECB done so far in the crisis and what is it capable of doing? Its mandate is to keep prices stable, i.e. curb inflation, and to keep the financial system stable, i.e. mitigate external shocks and prevent the kind of instability caused by collapsing financial institutions. Its tools to achieving these tasks are primarily the setting of interest rates for the eurozone and open market operations. By increasing or decreasing interest rates, the ECB can counteract the traditional economic “boom-and-bust” cycle. Setting higher interest rates in boom times make it more difficult to borrow money and therefore help prevent unsustainable bubbles and setting lower interest rates help keep credit in the markets during times of economic contraction. The ECB’s main open market operations essentially consist of cash loans to the banks, which inject liquidity into the eurozone’s economy and help regulate the money supply.

In response to the crisis, the ECB reduced interest rates to historic lows in an attempt to provide the eurozone with easier access to much-needed credit. More important, however, were its open market operations in the form of longer-term refinancing operations (LTROs), which, as economists have pointed out, have been crucial in preventing bank failures and reducing yields on government bonds in financially unstable countries such as Spain and Italy.

Encouraged by these successes, some commenters are calling for more action by the ECB, arguing that it should essentially act as a guarantee for eurozone governments’ debts and participate more directly in buying these types of government bonds to further reduce the pressures of the financial markets. Unfortunately, they are operating on the premise mentioned earlier, the premise that the ECB is responsible for the euro – which is not actually true. While the Bank handles the day-to-day (and month-to-month) management of the single currency, the euro itself is, by its very nature as the joint currency for 17 different countries, the product of political decisions and its future course is dependent on them.

As demonstrated above, the ECB undoubtedly has an essential role to play in the eurozone, but it would be wrong – and irresponsible – to hold its unelected Board accountable for the euro’s failure or success. While the Bank can devise and implement monetary policy, it can only operate within the framework set by EU leaders. It could not simply create the European Financial Stability Facility (the “firewall” which acts as a lender of last resort for eurozone countries in trouble), since its creation was a political decision by the governments of eurozone members and this type of lending facility has to be backed by member state guarantees. It is the democratically elected policymakers – the European Parliament, the Council and of course, national governments – who are responsible for the single currency. Only they can make the hard political decisions necessary to achieve the kind of fiscal integration that can keep the eurozone from falling apart. As appealing as the idea may seem to some, these choices cannot be outsourced to the European Central Bank.

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About the Author

Katharina Obermeier

Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.



  • Hi my opinion is can anyone stand alone in the euro crisis if no it should stand togather .

    Probability of banks easing this problem is more tangle on its own.

    IMF involved is easing but then banks owe the IMF here we are going in circles.

    In any where you are using money it comes out of a person and goes to the economy so why do banks need more QE(quanitive easing) in a country. If I decide not to pay for any reason then I stop spending my money this will affect you by just me alone and it spreads to the habitat you live in so how can you prosper.

    I think QE is a fool payment to prosper the economy because it will give the bank to plunge into. More debt.Why is this the banks use this money to gamble it into the economy they allready fear and hoping they gain hoping is not a strategy.

    The best strategy would come if those who become aware of the country economy even would force himself to understand it and help voluntarily to contribute to the economy and not by the same problemed bank think they would get the confidence back into the economy through their role.

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