Karl Kaltenthaler University of Akron and Case Western Reserve Univeristy

Transcription

1 Karl Kaltenthaler University of Akron and Case Western Reserve Univeristy

2 Questions 1. What has been the ECB s policy mandate? 2. What have been the policy challenges facing the ECB? 3. What policies has the ECB employed? 4. What have been the politics of going forward for the ECB?

3 The ECB s Policy Mandate A.) Origins Structure. -modeled on the German Bundesbank: independent central bank with decentralized structure -- placate German concerns about a new currency and common policy --hopefully gain quick credibility with markets --central bank independence and the price stability mandate considered best practices

4 ECB Mandate cont d ECB s Policy Mandate -modeled on the German Bundesbank --single mandate: price stability --defined as below 2% growth in consumer prices annualized --dual focus on money supply growth and inflation in policymaking

5 ECB Policy Mandate cont d Does not have a growth mandate! Policy mandate based on German monetarist thinking about monetary policy Reflected near unanimous consensus among central bankers that price stability is the foundation for long term, stable economic growth

6 Acceptance of the Bundesbank Model -Not popular with some European governments -Some did not like the great degree of independence given to ECB -Some did not like the sole focus on price stability -Germans and their Northern European allies won the argument -Central bankers backed the idea

7 ECB Concerns at Inception No common fiscal policy No European-level bank supervision Weak rules to enforce budget discipline Stability and Growth Pact (1997) had no teeth Some countries had fudged their numbers to get into the Euro-Italy, Spain, Portugal and later Greece

8 Launch of the Euro-Early Days Euro launched in 2001 First several years were a success Low inflation Solid growth in most of the Eurozone Strong currency against the dollar

9 The 2008 Crisis The two biggest threats to the Eurozone early one were failing banks and recession Portugal, Spain, Ireland, and Greece had bank failures that threatened their financial systems In Eastern/Central Europe bad loans threatened West European banks Economic growth was in a downward spiral-including Germany, the biggest Eurozone economy

10 ECB Response Offered short-term credit to banks at very favorable rates Lowered interest rates of 0% Engaged in a form of quantitative easing Meant taking on the debt from distressed banks Put more money into circulation and saved banks

11 The ECB Consensus is Broken The quantitative easing strategy caused a huge controversy within the ECB The ECB had operated under a kind of collective responsibility principle: no signs of internal dissension to the outside This fell apart over quantitative easing

12 The German Dissent Germans had two prominent people in the ECB: Juergen Stark, the chief economist and Axel Weber Both publicly criticized the bond-buying Argued it was against the ECB s mandate and rules: the ECB was monetizing debt Both resigned over it

13 The Sovereign Debt Crisis By 2010, Greece was in a serious debt crisis and on the brink of default Spain and Italy looked to be in trouble too The ECB has expanded its help and has entered into the sovereign debt market, ie, buying government debt This has been criticized publically by the president of the German Bundesbank

14 The Way Forward The ECB is no longer based on the German model in terms of policy The Germans are in conflict with its policies The ECB depends on its member central banks to fund its operations These operations are increasingly expensive and the balance sheet of the Bank worries some

15 The Way Forward Cont d The ECB cannot solve the Eurozone debt crisis on its own Will play a bigger role in bank supervision, which will help Will take: German government money Growth in the affected economies Market confidence that the EU has the will to solve this Markets seem ambivalent about this so far

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