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The ECB's Existential Dilemma

For years, the European Central Bank has been succumbing to political interests and pursuing objectives beyond the scope of its primary mandate: maintaining price stability. But now that inflationary pressures are building, the ECB’s credibility is on the line.

FRANKFURT – Our fiat money regime requires an institutional anchor that credibly and decisively ensures a stable price level and long-term confidence in the euro. Credibility is a central bank’s greatest asset, because it underwrites confidence in the purchasing power of money. And credibility, in turn, rests on the central bank’s independence from political influence, and on its commitment to monetary stability.

Viewed in this light, the European Central Bank has been in dangerous waters for several years. It has jeopardized its political independence and compromised its primary objective. Actions that are clearly intended to anticipate political pressure leave no doubt that it has exceeded its mandate.

For example, during the euro sovereign debt crisis that began in late 2009, the ECB actively participated in the restructuring of Europe’s Economic and Monetary Union (EMU). With its Security Markets Program, it abandoned important monetary-policy principles, including the ban on monetary financing of government debt and the requirement of a single monetary policy for the eurozone. The ECB also took a leading role in rescuing EU member states hit hard by the crisis, even though this was the respective national governments’ responsibility. The boundaries between monetary and fiscal policy thus were deliberately blurred, leading to close coordination between the two.