The European Central Bank - what can it do?
There has been some very interesting commentary lately about the role of the central banks, some saying how strong and co-operative they have been and others, like Sir Mervyn King, believing that the European Central Bank has gone “to the outer limit of what a central bank can do.” But these are very unusual times.
By making an enormous effort, a large number of countries came together and controlled the immediate results of the financial crisis – but some are having trouble with the aftermath. Governments are now focused on deficit reduction and creating and adjusting acceptable reduction plans. This has brought monetary policy to the fore and effective action has been taken. It is the implicit duty of a central bank, over and above its specific tasks, to protect the economic welfare of its country, or in the Eurozone’s case, combination of countries.
But it is not only the role of the central banks that is being questioned. Governments are considering direction and purpose, as often happens in a watershed period of history. In the US, the Tea Party activist movement is campaigning for small government and a return to self-reliance. Activism is easier to handle in good times; in contentious times, it can cause gridlock, although of course, activists tend to organise and exert influence when things are difficult, a sort of catch-22. When I was looking through my debt ceiling posts, I had this vague, almost abstract idea of the US boosting the second stage cuts from the agreed $l.4 trillion to the $1.7 trillion originally suggested, and using the difference to get people back to work, in infrastructure for example, and so lower the 9.1 percent unemployment figure. But I soon realised it would probably be considered impossible for various reasons, even though it would leave QE3 in reserve and might be achieved by faster tax reform.
The European Union is also experiencing varying degrees of change. The UK is seeking its role, both within the EU and internationally, and elsewhere, the important BRICS countries are stretching their wings. Of all this readjustment, the Eurozone’s is the most significant. It is presently addressing its difficulties and it was Eurozone policy to combine disparate economies under one currency and the point is approaching at which governance issues will be in the spotlight.
The Eurozone could power on, working towards the implementation of the July Summit agreement, reacting as needed to emergency issues, like the short selling ban, in the hope that eventually everyone will be safely on board. Or it could decide that a loose combination is not working well and consider adapting existing plans, by creating some form of fiscal union, as George Osborne has suggested, or a pan Eurozone finance ministry, as Jean-Claude Trichet has put forward, or a euro-area bond as proposed by Giulio Tremonti; although these are potentially controversial subjects with economic and democratic implications.
Chancellor George Osborne, staying the austerity course. Photo credit: Paul Toeman
In the UK’s case, it was policy, along with other member states, to remain outside the euro. The two economic divisions of the EU have chosen their individual paths and should follow them as well as they can. The UK is tied to the Eurozone by trade and to the EU by treaties. Thus the UK is affected by what the Eurozone does, it watches its progress and is concerned when it is in trouble. Lacking direct involvement in the currency’s corrective measures, it can, instead, be a sounding board and generate ideas. There is strength in differing opinion and methods of economic implementation. It’s sometimes useful to have a counter balance, saying we appreciate the theory to which you adhere, but the main issue for anyone on a set path is that it works well.
