Here is an interesting dimension to the European crisis that has not been widely noticed: the self-interest of the European Central Bank to maintain the euro at any cost. As the EU Observer reports, the ECB is willing to do anything to postpone the inevitable – the disintegration of the currency union:
Markets rallied after European Central Bank chief Mario Draghi on Thursday (26 July) pledged to do “whatever it takes” to salvage the euro and suggested the bank may buy more government bonds. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” he said during a conference in London. Among these tools is a bond purchasing programme which had stalled this year after it helped to lower the borrowing costs of Italy and Spain in 2011.
The ECB is a government institution above the national European governments and separate from the EU. It is, in a matter of speaking, an island of its own, with enormous economic power and a huge self interest in surviving as an institution. Not only is there a ton of prestige embedded in the institution itself, but its thousands of employees certainly have a self interest in preserving this fundamentally artificial government institution. For one, the very high salaries of ECB employees are exempt from Europe’s high income taxes.
There is a fair amount of good scholarly research in economics that support the idea of an independent central bank. However, that research is based on the premise that we are dealing with a historically “natural” central bank that has emerged within the borders of a sovereign nation. The political, economic and historic context of such central banks contributes toward keeping the bank in lockstep with the interests of the nation itself. When it comes to the ECB, however, we are for the first time in the history of central banking dealing with a major currency institution with a life of its own: its jurisdiction – the states that have adopted the euro – is entirely artificial and admittedly arbitrary, and the absence of a corresponding “traditional” government authority means that there is no fiscal policy counterpart to the ECB. As a result, the monetary policy of the ECB is left hanging artificially, almost like it exists in macroeconomic zero gravity space.
The remedy for this is not, however, to create a euro-zone common fiscal policy institution, as some Eurocrats want to do. The answer is instead an orderly retreat from the euro back to national currencies.If that does not happen we will see an ECB that is getting increasingly desperate in its measures to preserve its own relevance. Its promise to support Spain is in effect an open, endless line of credit – which in the case of a central bank means “our money printing presses will work over time”.
The ECB was created precisely to avoid this kind of situation: it was supposed to run a strict, tight and very conservative monetary policy. The reason was that the scholars who designed the bank – with Nobel Memorial Economics Prize winner Robert Mundell at the forefront – believed that inflation was primarily or entirely a monetary phenomenon. This is of course not true, and the pledge from the ECB to support Spain “no matter what”, on top of its already lavish promises to Greece, shows that either the ECB staff economists have come to realize that printing money does not necessarily create inflation (though it is bad for other reasons), or they have simply decided that their own organizational survival is more important than any principles of the policy instruments they have at their disposal.
The European Central Bank is a hybrid of a policy institution. Its existence is the result of a super-state dream that – thankfully – looks increasingly remote as the European welfare-state crisis proliferates. Hopefully, the future of the ECB will be shorter than its short history.