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The Power and Impotence of the European Central Bank. «Materialien» by Dario Stefano Dell’Aquila, Stephan Kaufmann and Jannis Milios.

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Published

October 2014

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Central banks resemble modern churches. They reside in grand buildings and they radiate an aura of authority, power, mystery and importance. Central banks are regarded as “guardians of stability and money”, and “provide society with liquidity”. Their mission seems unquestionably good and useful, because everyone wants a stable currency and fears the monster called inflation.

In economically calm times the general public is hardly even aware that central banks exist. They operate in the background. However, the financial and euro crisis moved the central banks of the industrialized nations into the focus of attention. The European Central Bank (ECB) was a central element of crisis management strategies and sat as the silent power at the same table as the politicians. It is often said that the ECB managed the crisis of financial markets virtually on its own.

Nonetheless, its anti-crisis measures have also made the ECB a focus of criticism. Economists are warning that the ECB is ruining the euro and the euro area. In Germany, the ECB policy was denounced before the Federal Constitutional Court. From the left too there is criticism of the ECB’s policies: “Following a capitalist logic, the policy of the Troika – imposed in particular by the ECB – of structural adjustment programs has had disastrous effects on the lives of millions of people.”

How does all this fit together? The first part of this publication uses readily accessible terms to explain what central banks normally do and how they “maintain” the value of money. The second part focuses on the special characteristics of the ECB and its policy in the crisis. First, we look at the ECB as a central bank and then at its European aspects. It should become clear from the discussion that central banks are never impartial and that there is a lot more to criticise about the ECB than the fact that it is a part of the Troika.

Contents

Part 1: The creator of the euro – what does the ECB do?

  • 1.1 What central banks aim to steer

Money creation and printing

  • 1.2 Money supply through credit
  • 1.3 The goals of the central bank: supply of liquidity and inflation control
  • 1.4 The key interest rate
  • 1.5 The ECB during the crisis

Part 2: The ECB as the saviour of the euro

  • 2.1 Criticism from Germany and resistance within the euro area

The case before Germany’s Federal Constitutional Court

  • 2.2 Special features of the ECB
  • 2.3 The ECB turns to politics: the case of Italy

Conclusion: the function of central banks and the ECB in particular