The ECB s Battle against Central Banking

Ecb Is Now Europe s Anchor

Capturing the ECB

European Central Bank (ECB)

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.

The ECB Grows Up

Is the ECB Doing Enough?

The ECB s Leap into the Unknown

The ECB Picks Up The Pace

To fund these redemptions on behalf of some member states, the ECB would issue bonds in its own name, guaranteed solely by the ECB, but repaid, in full, by the member state. Upon the issue of such an ECB bond, the ECB would simultaneously open a debit account for the member state on whose behalf it issued the bond.

Who Next at the ECB Helm?

The ECB s Faulty Weapon

The ECB s Tone Deaf President

In addition, the ECB could purchase EIB bonds on secondary markets, which would help to keep funding costs low or even reduce them. More important, purchases of EIB bonds would enable the ECB to undertake quantitative easing without triggering the degree of controversy implied by intervening in 18 separate sovereign bond markets, where concerns that ECB purchases would affect the relative pricing of sovereigns are very real.

Pushing up asset prices and pushing down the euro s exchange rate will require the ECB to buy bonds on the secondary market not the crisis countries bonds per se, but those of all eurozone members. In other words, it will require quantitative easing.

Helping the ECB Cross the Rubicon

The ECB and Its Critics

The ECB s Honeymoon is Over

All eyes are now on the European Central Bank s asset quality review, due to be completed in the next couple of months. The AQR is the key element in a comprehensive assessment of Europe s banks before the ECB formally takes on supervisory responsibility for more than 80 of the eurozone banking system in November.

The ECB s Path Not Taken

Germany s Case Against the ECB

LONDON The European Central Bank s recently announced policy of bond buying, what it calls outright monetary transactions (OMTs) marks a convergence of European central banks with their Anglo Saxon counterparts. While the ECB s actions represent the best chance yet to put an end to a crisis that has been playing out since 2010, the Bank has markedly raised the stakes for governments.

On the contrary, he should be able to build support for the ECB s independence. But he should follow the maxim about politicians set down by the ECB s first president, Wim Duisenberg I can hear them, but I do not listen.

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.

The ESM, supported by the ECB, could become a European version of the International Monetary Fund, and the new funds in the European budget could become, with support from the European Investment Bank, Europe s World Bank. All of this will take time, but there is some movement in the right direction.

As holders of euro denominated assets recognized this situation, they turned to the ECB for insurance (which the ECB could not deliver under its previous president, Jean Claude Trichet, whose leadership was defined by his commitment to maintaining price stability). Investors subsequent efforts to price in the risk of a eurozone breakup not the volume of sovereign debt caused bond yields to spike.

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.

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.

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.

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.

Trichet Takes Control At The ECB

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.

This figure includes ECB credit that financed capital flight from Ireland totaling 130 billion over the past three years. The ECB bailout program has enabled the people of the peripheral countries to continue to live beyond their means, and well heeled asset holders to take their wealth elsewhere.

Coupled with all this is northern European discontent with the central bankers, specifically with the ECB and the euro. It is not that the end of European Monetary Union is on the agenda it is merely that people have begun thinking about possible low probability futures in which the end of EMU might be placed on the agenda.

Inflation targeting means that a central bank puts the pursuit of price stability above all other objectives. This is what the ECB does and what the Fed s Alan Greenspan does not do.

By failing to produce the two thirds majority in the ECB Council needed to limit the Greek central bank s self serving strategy, it has allowed the creation of more than 80 billion in emergency liquidity, which exceeds the Greek central bank s 41 billion in recoverable assets. With Greece s banks guaranteed the needed funds, the government has been spared from having to introduce capital controls.

The ECB s New Macroeconomic Realism

If savers in Portuguese banks start moving their money to Germany, the ECB will recycle these euros back to Portugal through interbank deposits. Again, there is no limit to how much money the ECB can recycle, provided Portuguese banks remain solvent which they will, so long as the ECB continues to buy Portuguese government bonds.

Under the OMT program, the ECB can replace foreign outflows from sovereign bond markets through direct purchases, putting Spain on par with non eurozone countries like the United Kingdom. And, to the extent that there is even an informal price target associated with the ECB s commitment to purchase bonds, foreign outflows, at least from the sovereign bond market, are automatically replaced, in full, with ECB cash.

My proposal is to use the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) to insure the European Central Bank against the solvency risk on any newly issued Italian or Spanish treasury bills that it may buy from commercial banks. This would allow the European Banking Authority to treat these various T bills as the equivalent of cash, because they could be sold to the ECB at any time.

Like it or not, the ECB is effectively financing the sovereigns. German leaders have frowned on this, and the ECB has felt uncomfortable, limiting its purchases and saying that political leaders, not central bankers, should save the euro.

That is what the ECB is now throwing away.

It is an impressive list national responsibility for bank rescues the sanctity of the EU treaty s proscription of bailouts for governments rejection of European economic governance the ban on direct government financing by the European Central Bank refusal to support mutual liability for debt and, finally, the transformation of the ECB from a copy of the old Bundesbank into a European Federal Reserve Bank based on the Anglo Saxon model.

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.

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.