European Central Bank: deposit rates and democracy
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Version 0 of 1. A long time ago, in a different economic galaxy, the European Central Bank was engineered to insulate it from democratic pressure. But in aggressively combatting deflation on Thursday, turning one interest rate negative, it looked, whether intentionally or not, like an institution paying some heed to the rage that a continent has just expressed at the ballot box. The inflationary 1970s cast a long shadow, and fashionable economic theories – as ever, a good few paces behind events – suggested to the Euro's architects that controlling prices meant keeping monetary management well away from the grubby hands of politicians. This notion was given effect in 1990s Britain too, with an independent Bank of England, but the victory of the technocrats was complete in Frankfurt. Whereas Threadneedle Street still had to reckon with a chancellor, there was no European finance minister. And a fat lot of good all this autonomy has done the central bankers in Frankfurt, and indeed the people of Europe, during seven slumpish years. Instead of targeting inflation at 2%, and, like the UK, correcting for under- as well as over-shoots, the ECB has often thought more rigidly, in terms of a 2% ceiling. Quantitative easing provided new policy options for London and Washington, but Frankfurt's printing presses long sat idle. Rates fell too slowly – finally reaching the 0.5%, which London had hit in early 2009, only last year. Once the crisis in the vaults of the continent's banks spread to engulf first national treasuries, and then the Euro itself, the ECB was rudely reminded that, when the worst happens and taxpayer guarantees are required, a politician with a mandate is a handy person to have about. Instead, Frankfurt had to watch rival states push each other to the brink, before doing just enough to nudge the next crisis down the road. But unlike his cripplingly cautious predecessor, ECB president Mario Draghi quickly grasped that something had to happen, and that nobody but him could see that it did. At a stroke, his 2012 vow to do "whatever it takes", central bank code for creating as much currency as required to avoid a ruinous run on deposits, dispelled the imminent threat of a Euro break-up. Shrewdly, he coupled Thursday's interest rate cuts to a declaration that "we're not finished here". Hopes for growth are waning, unemployment is stubborn, and prices are but half a percentage point away from outright deflation. The fundamental frailty of so many European banks is not resolved by Thursday's refinancing package. The Draghi pledge to do "whatever it takes" ended an immediate crisis, and so rendered itself superfluous. But the fresh Draghi promise to do more to shrug off general stagnation is a commitment on which the president should expect to be called. |