Sunday, May 23, 2010
Cool Shower Photography By Manjari Sharma
So you think that it has been doing his job well all these years...
Yes, the ECB, until it was forced to bend in the Greek crisis, has been excellent. The success of the euro has been the proof.
Then we can consider the Greek crisis as the first and real impasse for the European Central Bank.
The ECB is no longer as independent as it was, its rate policy will now reflect wider economic needs that the simple inflation mandate of its charter. The ECB charter did not protect it when the first crisis struck, and it will not work in the future. The structural changes necessary in Europe to surmount (if indeed that is possible) this crisis will insure lower EMU economic growth over the next five years at least. Lower growth and lower interest rates will keep the euro weak.
How did the Euro co-existed with other majors currencies in the past?
The story is in the trading rates. The ECB inflation focus, inherited and stiffened by the German Bundesbank, enabled it to dominate the decade. It gained against every major currency. The crisis has brought the ECB back to earth and the euro as well.
Do you believe the Euro will reach parity with the Pound? Any option that UK become an Eurozone member?
I do not think the sterling and the euro will reach parity. The euro would currently have to rise to 1.4800 versus the dollar to be at parity with the sterling or the sterling would have to fall to 1.2600, neither is likely. The UK will not enter the EMU.
But the ECB is forced by law to control the Euro's stability as well as the inflation in the EMU, not the growth. Do you suggest this should be changed?
Yes, the inflation mandate did limit the ECB effectiveness in the Greek crisis. Compare it with the near limitless activity of the US Federal Reserve in 2008 and 2009. The changes are already in train forced by the Greek crisis and demanded by the EU leadership. In reality the ECB independence and forcefulness against inflation of this past decade has been an anomaly. Central banks do not exist outside their political environment.