European Central Bank (ECB)

Photograph of Jean Claude Trichet (c) European Central Bank Andreas Böttcher

Not every country s central bank not even every friendly country s central bank has been invited to join the swap lines club. Membership is restricted to the United States Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada.

The IMF, the World Bank, and other international financial institutions, such as the European Investment Bank and the European Bank for Reconstruction and Development, as well as the European Central Bank and the European Commission, have worked together to stabilize the situation. The G20 has led the way on the international level.

Last year, the Shanghai Hong Kong Stock Connect was launched to stimulate cross border investment and capital market development. And China has signed bilateral currency swap agreements with 28 central banks, including the Central Bank of Brazil, the Bank of Canada, the European Central Bank, and the Bank of England.

The European Central Bank would also be prepared to attend a meeting to clarify terms of reference.

In order to understand the conflict, it is useful to compare the Fed s independence with that of the Bank of England and the European Central Bank.

From Central Bank to Central Planning?

Central Bank Confidential

Whose Central Bank?

PALO ALTO Once upon a time, European Central Bank President Jean Claude Trichet communicated effectively with the outside world. Not anymore.

The only reason the country has not long since defaulted on its debts is that the European Central Bank continues to provide funds to the Greek central bank through its emergency liquidity assistance (ELA) scheme. The Greek central bank, in turn, lends money to the country s commercial banks, which lend it to Greek citizens and foreign creditors.

At the Lima meeting, the traditionalist counterview came from Benoît Cœuré of the European Central Bank. A central bank, he argued, needs a very simple mandate that allows it to explain its actions clearly and be held accountable for them.

The more French president Nicolas Sarkozy attacks the European Central Bank and the strong euro, the more he is criticized in the European media, by European finance ministers, European Union officials and the ECB itself. The critics are right.

And the European Central Bank has consistently shown that it will stand by the euro. Yet experts and partners often underestimate our determination.

Far more disconcerting is the willingness of major central banks not just the Fed, but also the European Central Bank, the Bank of England, and the Bank of Japan to inject massive amounts of excess liquidity into asset markets excesses that cannot be absorbed by sluggish real economies. That puts central banks in the destabilizing position of abdicating control over financial markets.

But the UK government could and undoubtedly would veto any such adaptation of the Bank of England s responsibilities for monetary policy, financial stability, and banking supervision. Any other conceivable model of monetary union including one based on a central bank as unaccountable as the European Central Bank would be subject to the same rejection.

Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.

Most obviously, the European Central Bank announced an ambitious program of asset purchases quantitative easing in late January. That prospect rapidly drove down the euro s exchange rate, enhancing the international competitiveness of European goods.

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.

The fourth of the channels, the exchange rate, has already been functioning. The prospect of US monetary tightening coincides with moves by the European Central Bank and the Bank of Japan toward enhanced monetary stimulus.

Securities prices are extraordinarily high, considering the backdrop of flaccid economic growth. Bond prices have soared on the back of quantitative easing by the Bank of Japan, the Federal Reserve, and the European Central Bank.

But EU institutions have not been entirely inactive. The European Commission asked an eminent persons group, chaired by Erkki Liikanen, the head of the Finnish central bank, to examine this issue on a European scale.

It has been essentially (though not explicitly) adopted by major central banks, including the US Federal Reserve, the European Central Bank, and the Swiss National Bank. But the 2008 global economic crisis, from which the world has yet to recover fully, has cast serious doubt on this approach.

This argument does not hold for a government without its own central bank, in which case it faces exactly the same budget constraint as the oft cited Swabian housewife. That is why some eurozone member states got into so much trouble until the European Central Bank rescued them.

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.

Central Bank (Information and Financial Analysis Unit)

Central Bank (Information and Financial Analysis Unit)

There is a strong case for monetization two in the eurozone, which faces zero growth and deflation. Indeed, while the QE program unveiled by the European Central Bank in January consists mainly of sovereign debt purchases, the ECB will also buy debt issued by the European Commission and the European Investment Bank key elements of monetization two.

For mainstream French politicians, renouncing the European project to buy the time required to restore competitiveness is as unthinkable as is the logical alternative an all out push for full European political union. This would reestablish monetary sovereignty and create a normal central bank (like the Federal Reserve or the Bank of England) at the European level.

BRUSSELS Stubbornly low inflation has the European Central Bank worried. But its response essentially just more quantitative easing could backfire, exacerbating imbalances and generating serious financial instability.

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.

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.

Presumably, the eurobonds would be under the control of the eurozone finance ministers. The board would constitute the fiscal counterpart of the European Central Bank it would also be the European counterpart of the International Monetary Fund.

The most surprising and controversial thing about last December s rate hike by the European Central Bank was that, after two and a half years of keeping interest rates at exceptionally low levels, the bank ventured an increase of only 25 basis points with no promise of more to come. Political pressure on Europe s central bank may be the reason for that timid move.

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.

Who does Chirac think is at fault? The European Central Bank, of course, for allowing the euro to appreciate too much and for not cutting interest rates enough.

According to Laurent Dubois, a political science professor at the Sorbonne in Paris, Noyer may pay for Sarkozy s battles with the European Central Bank. Sarkozy has a problem with central banks independence, and Noyer may become a scapegoat.

But the tentative agreement between Cyprus and the troika (the European Commission, the International Monetary Fund, and the European Central Bank) probably means that the worst has been avoided. Big losses for large depositors in Cypriot banks will now be imposed, and the country s second largest bank will be shuttered.

Central and Eastern European States 2

BRUSSELS A key question confronts the four presidents of Europe s major institutions (the European Commission, the European Council, the European Central Bank, and the Eurogroup) as they prepare their report on how to reform the common currency Does the eurozone need its own budget?

For the persons licensed by the Central Bank the criteria for considering the transactions as suspicious are established by the Board of the Central Bank.

Some monetary authorities, like the European Central Bank, set their own target. Others, like the Bank of England (BoE), have full instrument independence control over short term interest rates but must meet an inflation target set by the government.

The vision of central bank independence as a necessary part of the constitution of a sound and stable political order was not simply a European construct in the 1990 s. It was also reflected in legislative changes affecting other central banks, and in central bankers growing prestige.

Reforming governance implies significant progress toward economic unification centralizing European debt through Eurobonds, mobilizing sufficient rescue funds, allowing the European Central Bank to intervene in the primary bond markets, and establishing both a fiscal and a banking union.