ECB acts in crisis as European institutions are blocked

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The European Central Bank under president Jean-Claude Trichet has had to overcome strong taboos to take control of the ongoing eurozone debt crisis as political leaders remain divided, analysts say.

"The ECB is finding that it is an illusion to believe that the only objective for a central bank is price stability," as written in its statutes, said Paul de Grauwe, an economy professor at the University of Louvain in Belgium.

"That was inevitable because it is the only (European) institution that has the (financial) resources to act," he added.

After rushing to the rescue of banks as soon as the financial crisis erupted in 2007 by offering cheap loans, and then agreeing in 2010 to buy Greek government bonds to help save Athens from default, the ECB opened the taps this week for Italy and Spain.

"In a few years, everything that seemed taboo has been done," said Gilles Moec, a senior economist at Deutsche Bank.

The ECB was created along the model of the German central bank, with total independence to avoid pressure from politicians wanting it to fund increased growth by ramping up the money printing presses despite the risk of inflation.

"But with the generalised sovereign debt crisis among G7 countries, we see that a central bank cannot remain independent. The ECB cannot let a country go bankrupt," said Sylvain Broyer, an economist at Natixis.

"If it had not bought sovereign bonds, there was a risk the eurozone might break up," note Christian Schulz, a senior economist at Berenberg Bank.

All observers note the strong potential for adaptation by the bank, created 12 years ago, given the necessity to preserve the eurozone.

Its young age is an advantage, it was equipped from the beginning with "a modern tool kit when the crisis erupted," unlike the US Federal Reserve or the Bank of England, Broyer stressed.

Its reactivity also owes a lot to the personality of Trichet, one of the euro's founding fathers, the economists said.

"He is not a theoretician. He has a few solid convictions like the fight against inflation and budget deficits but he is also very pragmatic and politically agile," said Moec, who worked with Trichet at the Bank of France.

Trichet is to step down at the end of October after completing an eight-year mandate to be replaced by Italian central bank head Mario Draghi.

"Faced with great problems, Trichet has been able to act and convince the majority of his colleagues," Schulz noted.

Aside from bond purchases, which the European Financial Stability Facility (EFSF) is to take over later this year, the ECB was a key player in putting in place bailouts for Greece, Ireland and Portugal.

It also pilots the European Systemic Risk Board (ESRB) and according to Italian media it dictated Rome's new austerity plan in a letter sent to Prime Minister Silvio Berlusconi in return for buying Italian government bonds.

These new responsibilities underscore the weakness of other European institutions.

"The ECB acted by default of another institution capable of doing it," noted Jean Pisani-Ferry, who runs the Bruegel institute in Brussels.

"That shows an imbalance of the institutional system, with a (European) Commission that is too weak, in which heads of state and government do not have confidence and an ECB of which they ask too much," he said.

"It is a delicate evolution" for the bank, Pisani-Ferry added, noting that it risked exposing the bank to critics and embroiling it in political debates, "things which are not very comfortable for a central bank."

Paul de Grauwe denounced "a political abdication" with respect to recent problems, with divisions among the eurozone's 17 member countries paralysing them.

The only solution according to de Grauwe is thinking about "a more intense political union."

© 2011 AFP

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