The derailed policies of the ECB

• Published in: CESifo forum Vol. 13; pp. 43 - 49
• Main Author: Milbradt, Georg
• Format: Journal Article
• Language: English
• Published: München Ifo 2012; Institut für Wirtschaftsforschung (Ifo)
• Subjects: Bailouts; Balance of payments; Banking; Currency; Debt financing; Economic crisis; Economic theory; European Monetary Union; Eurozone; Foreign exchange rates; International finance; Manycountries; Monetary policy; Securities markets; Sovereign debt; State budgets; Europe
• ISSN: 1615-245X; 2190-717X

The problems revealed a few months ago by Hans-Werner Sinn of the Target balances between the ECB and national central banks (NCBs), especially the Bundesbank, on the one side, and the NCBs of the peripheral countries, Greece, Ireland, Portugal Spain, and recently Italy (GIPS countries), on the other, has made clear that there are serious institutional weaknesses in the Eurosystem and significant negative developments in the euro area that in terms of their scope and dangers go even further than the sovereign debt crisis and the rescue plan constructed by the euro countries, both of which are the subject of public controversy (first Greek rescue plan, EFSM, EFSF). Triggered by the massive deficit in the Greek state budget that emerged into public view in late 2010, the political and economic interest focused mainly on excessive debt financing in Greece and Portugal, the housing bubble in Ireland and Spain, the associated effects on the banking systems in the euro area and the reaction of the financial markets. The policy measures to avert an alleged second 'Lehman crisis' are well-known: the provision of a rescue plan for Greece, Ireland and Portugal and perhaps for Spain and Italy, with certain requirements for fiscal and economic policy and the assumption of bank risks by taxpayers. The excessive public and private debt, however, is only the tip of the iceberg of a deep-seated balance of payments crisis within the euro area as a result of external economic abuses that were largely unnoticed before the crisis and that had arisen since the introduction of the euro. [PUB ABSTRACT]