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European Central Bank turns 15 in Frankfurt

Compared to most teenagers, the European Central Bank, which celebrates its 15th birthday on Saturday, has not exactly had an easy time of it.

European Central Bank turns 15 in Frankfurt
Photo: DPA

In 2008, when it was still a tender 10 years old, the ECB found itself at the heart of a crisis that threatened the very existence of the euro. And the Frankfurt-based institution has been fighting to stamp out the fires ever since.

Frequently referred to as the “guardian of the euro” during its early years, the use of that moniker has receded as the single currency found itself on the brink of disintegration.

Instead, Europe’s politicians have been all too eager to paint the ECB as either the scapegoat or saviour in Europe’s long and debilitating sovereign debt crisis.

Analysts said countless unforeseen challenges have forced the ECB to think on its feet since taking over monetary policy 15 years ago for the countries that share the euro, now numbering 17.

But they testify that the bank has largely done a good job for such a young and untested institution.

“There certainly have been enormous challenges, but they’ve managed to live up to them more than most of us would have expected,” said Ernst & Young Eurozone Forecast economist Marie Diron.

“Most observers would agree that monetary policy has been appropriate for much of this time. If there have been the odd mistakes, they’ve managed to correct them very quickly. But they’ve been learning on their feet,” the expert told AFP.

Berenberg Bank chief economist Holger Schmieding agreed.

“The ECB has delivered an average inflation rate of 2.05 percent, which is very close to its mandate of maintaining price stability,” Schmieding said.

“In this respect, the ECB has done an excellent job, better than any other major central bank in the world and much better than the Bundesbank,” he said, referring to the once-mighty German central bank on which the ECB is largely modelled.

Unlike the US Federal Reserve, which can actively take measures to support economic growth, the ECB’s overriding mandate is to keep a lid on inflation. The ECB’s detractors like to compare it unfavourably to the Fed.

But Gilles Moec, head of European Economics research at Deutsche Bank, said such comparisons were unfair, given the different financial and institutional set-ups on either side of the Atlantic.

Overall, he was “fairly positive about the (ECB’s) handling of the crisis given the constraints it faces,” Moec said.

In a recent speech, ECB President Mario Draghi also seemed to suggest that the bank’s success in managing the crisis has been achieved by a process of learning by doing.

“We have responded by deploying measures that … have evolved as the crisis itself has morphed,” he said.

As part of its anti-crisis armoury, the ECB has pumped unprecedented amounts of liquidity into the financial system to avert a dangerous credit crunch.

And it launched a programme, known as Outright Monetary Transactions, or OMTs, to buy up the sovereign debt of countries that are finding it difficult to tap the financial markets.

But executive board member Yves Mersch said recently that the ECB’s “most important unconventional measure” was that it had been “advocates of change.”

“We have raised awareness of the need for profound transformations in our political economy and in our societies,” he said.

Looking ahead, Diron at Ernst & Young said the main challenges facing the ECB will be the task of banking supervision across the whole euro area. Finding a monetary policy which can cope adequately with the heterogeneity of the euro area would also be very difficult, she said.

During the years of Wim Duisenberg, who headed the ECB from its inception until 2003, and Jean-Claude Trichet, who ruled from 2003 until 2011, the central bank constantly stressed its one-size-fits-all view of monetary policy.

While that was necessary to engender a unified and strong cultural identity, it meant the imbalances created by having the same interest rate for a whole range of different economies were more easily overlooked, one ECB source told AFP.

But since those imbalances are at the heart of the current crisis, the ECB is now having to rethink its communication strategy.

“Communication wasn’t the ECB’s strong point. But that was in its nature, given the size of the governing council,” said Christian Bordes, professor in economic science in Paris.

“Under Trichet, there was a tendency to use code words, which was probably not a very good idea and backfired a bit. Communication under Draghi has probably been a bit better,” said Diron at Ernst & Young.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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