The ECB – Europe’s latest scapegoat

By Stewart Fleming

Date: 09/06/05

Shortly after he was appointed president of the Bundesbank in 1980, Karl-Otto Pöhl was asked who were his most reliable allies.

The German central bank had just set out on the unpopular course of tightening monetary policy to fight inflation. This was a strategy which would eventually result in German voters enduring the highest interest rates in the Federal Republic's post-war history. It would also tip the German economy into recession. "The German people," Pöhl replied unhesitatingly, "support the Bundesbank."

Jean-Claude Trichet, the president of the European Central Bank (ECB), the Bundesbank's successor as Europe's interest rate setting seigneur, would find it hard to respond to the same question today with such confidence.

The ECB does not enjoy rock solid support among the voters in its twelve constituencies. Unlike the Bundesbank and the D-mark, the ECB and the euro do not stand as symbols of a nation's spiritual and material regeneration, bulwarks against an enfeebled political class and hyper-inflation, the embodiment of a people's will to confront its past and overcome it.

On the contrary, in the wake of the French and Dutch rejection of the EU constitution in referenda last week, there is a danger that the ECB could join other institutions, such as the European Commission, as one of the EU's whipping boys.

Because it is not cutting its already historically low interest rates, the ECB is being pilloried by politicians who are looking for a scapegoat to blame for their failure to embrace unavoidable economic reforms.

It may not be long before voters will decide that the unelected elite in Frankfurt does not merit their support any more than does the Commission.

The difference is that the undermining of 'Brussels' and its institutions, while damaging in the long run, does not have short-term consequences that cannot be contained. But the weakening of the ECB does.

At a time when the global economy is tottering around the edge of financial disaster, the ECB is charged with managing the currency of the world's second largest economic zone. If its legitimacy and freedom to manoeuvre are undermined, Europe will pay a heavy price.

Last week Roberto Maroni, Italy's welfare minister, called for his country to hold a referendum on pulling out of the single currency. His comments drew an uncharacteristically blunt rebuke from Otmar Issing, the ECB's chief economist and a member of its executive board. For Italy, such a move, Issing said, would be tantamount to committing "economic suicide".

Maroni's comments, taken at face value, are ridiculous. Italy is sinking into a cyclical recession. Its long-term economic prospects can, generously, be best characterised as "murky". But Maroni's comments should not be taken at face value. They were a coded attack on the ECB designed to intensify the pressure on it to cut its interest rates.

At last week's 'ECB Watchers' conference at the Goethe University Centre for Financial Studies, speakers warned the bank that it was in danger of compromising its long-term credibility as a bulwark against inflation by not taking seriously enough the inflationary threat implicit in the rapid expansion of credit across the eurozone.

House prices in several countries are signalling the emergence of an asset price bubble. On the evidence of Japan's experience since the early 1990s, if left untreated, this could condemn the EU to a period of stagnation and even deflation, says Daniel Gros, of the Centre for European Policy Studies, one of the authors of EMU at Risk, an analysis of the emerging threats to the euro.

This is not the populist view of the ECB's monetary policy. But it is a credible one. The case for significantly lower interest rates in the eurozone is far from clear cut. What is clear, however, is that its capacity to take unpopular decisions, of the sort the Bundesbank took in 1980-81, could be compromised by a lack of popular support.

"If the eurozone's political leaders do not take care, if they fail to recognise the danger to the ECB implicit in the institutional crisis triggered by the French and Dutch 'No' votes and adjust their rhetoric accordingly, then they could end up undermining the credibility of their independent central bank just when they need it most," says Gros.

• Stewart Fleming is a freelance journalist based in Brussels.

Article suggests that the ECB was being put under pressure by politicians who were looking for a scapegoat to blame for their failure to embrace unavoidable economic reforms.

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