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The European Central Bank saved the euro and kept prices stable for years. But lately inflation has gotten out of control. How has the ECB fared in its quarter-century of existence?
“Here comes the euro”: Some 25 years ago, Wim Duisenberg, then president of the European Central Bank (ECB), welcomed the new common European currency with these simple words. The Dutchman appears distinct and relaxed. In doing so, he quickly popularized the new currency, even if he had to admit that the euro was already expensive at the time.
Overall, however, the economic and financial world remains in order. This allows the ECB to focus on its core task of controlling prices and calmly seek its place in the world of international central banks.
crisis ensues
Twenty-five years later, the world looks very different: the current president, Christine Lagarde, would probably be happy if she still had the environment of the Duisenberg era. Instead, since taking office in the fall of 2019, the Frenchwoman has been chasing one crisis after another: the coronavirus pandemic, the collapse of supply chains, Russia’s war on Ukraine, the energy collapse, tensions with China.
Everything contributes, directly or indirectly, to inflation, which at times reaches record highs and remains at levels not seen in decades. So far, Lagarde has not been spared.
Carefully prepare to start
In these chaotic and turbulent times, the European Central Bank is celebrating its 25th birthday this week with an unprecedented gathering of guests – just a few weeks before June 1, the official date for the currency watchdog to start work in Frankfurt am Main a few days. Not impromptu, but well prepared.
Previously, the European Monetary Institute (EMI) spent three and a half years carefully designing the structure, organization and working methods of the new central bank, meticulously drawing a blueprint for the ECB. This is based on the Maastricht Treaty of 1992, which determined the European Economic and Monetary Union (EMU).
This makes the euro a formally spectacular and unique institution, but also controversial and contradictory. There is nowhere in the world, nor is there a central bank with 11 member states and now 20 member states – all with different economic strengths, sometimes with different monetary policy traditions, with a view to how a common currency works There are also different views.
critics were initially skeptical
Critics don’t give the project much chance and don’t believe that a common currency will balance out the differences among member countries, leading to the desired harmonization of economies and levels of prosperity. It didn’t actually work out, but the ECB weathered all the storms and thunderstorms and quickly became the second most important central bank in the world.
Volker Wieland of Goethe University Frankfurt’s School of Finance, a former member of the Economist, puts it simply: the ECB is responsible for “a very unique constellation that never existed before the monetary policy of a coalition of countries”. So far, the agency has “managed much better than many skeptics and critics expected”.
It will be more complicated from 2007
Arguably the happiest period at the ECB was the tenure of Duisenberg and his successor, Jean-Claude Trichet, who took over in 2003. Duisenberg occasionally made mistakes and roiled financial markets with his statements. But in general, like Trichet in France, the Dutch have managed to build a strong, stable currency with inflation that is not only enviably low, but higher than what countries achieved when they had their own currencies many times lower.
Dutchman Wim Duisenberg was the first President of the European Central Bank from 1998 to 2003.
However, from 2007 onwards, the last third of Trichet’s tenure, dark clouds were brewing: first the so-called subprime mortgage crisis, the collapse of the US housing market due to bank speculation. It led to the ECB’s first large-scale intervention in financial markets. When the financial crisis triggered by the collapse of American bank Lehman Brothers broke out in September 2008, the European Central Bank also had to support the European banking industry with large capital injections.
“at all costs”
After Trichet’s successor, the Italian Mario Draghi, took over the offices at the Europa Tower in autumn 2011, it became very turbulent, but also dangerous. The financial and debt crisis has weakened the European economy. Speculators have massively attacked the euro in an attempt to destroy the common currency. In a smart move by Draghi in July 2012, he delivered his famous “whatever it takes” speech in London to save the euro: “Within our mandate, the ECB is ready to do anything to protect the Euros. Trust me: that’s enough.”
That’s enough: Billions of people bought bonds. That should stimulate the economy, and then drive away the specter of deflation — that is, falling prices. At the same time, interest rates continued to decrease until they eventually fell into negative territory. Economically it’s ridiculous. But Draghi just pulled out all the stops.
Much stronger than originally planned
In this way, it is possible to protect the euro and support the common currency. However, this did not come for free for eurozone citizens: the result was years of zero interest rates. It caused a bubble in the stock and real estate markets. With politicians unwilling or unable to reform the monetary union, the ECB is increasingly becoming a fire brigade; it must step in where political accountability fails.
As a result, the powers of the ECB have been expanded. In 2014, she also oversaw the largest financial institution in the currency union. Critics complain that monetary policy and financial regulation have different and conflicting interests and should not be under the same roof. The ECB has introduced a “Chinese wall” between the two departments, arguing that one cannot do without the other.
Overall, the ECB has become much stronger than its founding fathers envisioned. Suddenly, it was no longer just about following the practical task of ensuring price stability: it was about securing the entire currency union, ensuring financial sector stability and creating favorable financing conditions for highly indebted member states.
criticism from germany
Members of the governing board were not always happy about the actions of Draghi, who also likes to go it alone. There is a great controversy between the so-called “hawks” and “doves”, that is, on the one hand, it means tight monetary policy, on the other hand, it means loose. Some throw in the towel, especially on the German side: ECB Chief Economist Jürgen Stark, Governing Council member Sabine Lautenschläger and Bundesbank President Axel Weber left the Governing Council because they could no longer support ECB monetary policy and did not want to Do. Some disputes against this backdrop have even ended up in Europe’s highest court, but without harming the ECB.
Instead, the agency grew bigger, more stable, and more influential. Their new home – the Eurotower, completed in 2015 and one of the most imposing structures in a major metropolis – has become a symbol of this new position of power and the new wind the ECB is blowing. Draghi – much criticized, but also successful – left the Tower of Europe in November 2019 with the halo of Europe’s savior, leaving behind an institution that has rapidly outgrown its infancy.
Inflation was assessed as a “transient phenomenon”.
At that time, everyone actually felt that it would not be so turbulent now. In the final months of Draghi’s tenure, the massive bond-buying program has been scaled back and monetary policy normalization is on the horizon. France’s Christine Lagarde is now at the helm: an imposing figure, longtime head of the International Monetary Fund, but without the steady scent of the central banking world.
All the economic turmoil from the coronavirus and the war quickly brought the ECB back into the game. Loose monetary policy continued. The ECB is ignoring all warnings that the virus is also changing the structure of the economy and thus boosting inflation. It is too late to realize that the price explosion is not just a “temporary phenomenon,” as the monetary watchdog has repeatedly claimed.
Inflation is well above 20 percent in the Baltic states, 10.6 percent in the euro zone and 8.8 percent in Germany, both hitting record highs last year. In particular, the Anglo-Saxon central banks responded quickly and massively to inflation by raising interest rates, while the ECB was hesitant. As a result, inflation in the eurozone was able to take root in many areas. But at least Lagarde has opened up a turnaround in interest rates, canceled negative interest rates, and promoted the normalization of monetary policy.
“No, I’m not satisfied”
“If you’re asking me if I’m happy with where we are,” the president said EXCLUSIVELY AdelaideTake the interview and answer right away: “No, I’m not satisfied,” Lagarde said. “I’m only going to be satisfied when we hit our target of 2% inflation over the medium term.” Until then, a lot of water should still be flowing along the main roads.
Despite all the turmoil and criticism, some 340 million people in the euro zone still have faith in the common currency and the ECB. In one survey, nearly 80% of respondents said they trusted the euro. There is no better gift for currency keepers than this.