The European Central Bank, set up in June 1998 as the centrepiece of economic and monetary union (EMU) in Europe, is a unique institution at the centre of a single currency for 17 European member states which have pooled monetary policy while remaining politically and fiscally independent nations.
Under its two presidents – Wim Duisenberg from the Netherlands, who ran the bank from its foundation until the end of October 2003, and Jean-Claude Trichet from France, who took over the reins in November 2003 and is due to retire at the end of October this year. The ECB has established itself as the second most powerful central bank in the world after the US Federal Reserve. The euro has become the second most important reserve and transaction currency after the dollar.
The ECB – its resilience and staying power tested by manifold tussles with politicians and the financial markets – has become a byword for an archetypal independent central bank resolved to maintain purchasing power and control inflation. It follows in the footsteps of the quintessentially hard currency central bank, the German Bundesbank, from which it took over many of its traditions.
However, despite these achievements, the ECB faces manifold challenges. The sovereign debt crisis in Europe has exposed the negative consequences of the ‘one size fits all’ monetary policy inaugurated with the birth of the euro in January 1999. Politicians have been slow to recognise and remedy the upheavals – leaving the ECB to play a disproportionate role in steps to withstand the fall-out, ranging from action to maintain low interest rates to massive liquidity injections to hard-pressed European banks.
The ECB has been adding its voice to calls for more coordinated European policies to bring public and private sector actions into line with longer-term requirements to maintain monetary and financial stability in Europe. This will almost certainly require member states to give up elements of fiscal sovereignty in a bid to uphold budgetary discipline and avoid undue economic disequilibrium among member states.
Meanwhile, the decision to start buying peripheral European countries’ bonds in May 2010 was a watershed for many, since the ECB seemed to be helping circumvent the ‘no bail-out’ clause at the heart of the Maastricht treaty. The ECB has to do its best to engineer a secure future for the hard-hit peripheral states without exposing itself to ‘moral hazard’ through giving them pain-free options to surmount often self-induced difficulties.
The 16th annual conference of the German-British Forum, being held in conjunction with the Official Monetary and Financial Institutions Forum and the Royal Institute of International Affairs (Chatham House), will explore all these issues from several perspectives with the aid of a multinational speaker line-up composed of economists, bankers and industrialists. An important keynote address will be given at lunchtime on 26 May by Dr. Lorenzo Bini Smaghi, Board Member of the European Central Bank responsible for the ECB’s international activities.