The European Central Bank must at the moment be the most unpopular institution in the world. 

At a press conference today Mario Draghi the President of the European Central Bank announced a further cut in interest rates.  He also said that the European Central Bank would not be stepping up its buying programme of eurozone government bonds.  This is consistent with his earlier comments that the European Central Bank cannot act in such a way unless a proper fiscal union is first set up.

Mr. Draghi’s comments have been received with horror.  The financial markets, which had somehow convinced themselves that a massive bond buying spree was on the way, have gone into a tailspin. Financial pundits ranging from Paul Krugman on the left to Jeremy Warner on the right have reacted with similar horror.  Ultra Keynesians such as Mike Whitney, Dean Baker and Mark Weisbrot have been talking darkly for some time of a sinister plot by the European Central Bank to use the crisis to impose orthodoxy and austerity on Europe.

This abuse of Mr. Draghi and of the European Central Bank is misplaced.  The European Central Bank has been able to buy eurozone government bonds up to now because it is awash with money that European banks have placed on deposit with it because they do not trust each other.  News today of the fragile condition of the big German banks with Commerzbank apparently in especially severe trouble shows what a brittle basis for a bond buying programme this is.  Since the eurozone was anyway always intended to be merely a currency union as opposed to a transfer union, even the existing bond buying programme is technically illegal and has already caused the resignation of a German member of the board. 

In the light of this it is not surprising that Mr. Draghi and the European Central Bank are so unwilling to implement the kind of bond buying programme that is being demanded of them.  As for Mr. Draghi’s earlier comments that the European Central Bank cannot do more without a fiscal union, followers of this blog will know that he is only talking sense.

Jeremy Warner in an article in the Daily Telegraph makes a comment that expresses perfectly the naivety that exists concerning the European Central Bank.  He says that following Mr. Draghi’s latest comments the markets are beginning to suspect that the European Central Bank is not a real central bank like the Federal Reserve Board or the Bank of England but is a mere “apparatchik”.  If that is what the markets think then they are of course right and not before time.  A mere “apparatchik” is precisely what the European Central Bank is and always has been.  Given that that is what its charter and the treaties say why do so many people persist in thinking otherwise?


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