The performance of the European Central Bank since the onset of the economic crisis has been "completely appalling", the chief economics commentator for the Financial Times, Martin Wolf, said in an address in Dublin yesterday.
The euro zone area has “basically fallen into total stagnation” and the ECB has “failed utterly” in terms of meeting its own inflation target, according to Mr Wolf.
Since 2008 the region had managed nominal economic growth of 0.6 per cent per year, a "dire performance", he said at the Institute of International and European Affairs in a talk entitled The Euro: The Future of a Bad Monetary Marriage.
After a “honeymoon period” after the creation of the euro, the crisis prompted “serious discussion” as to the possibility of a break-up of the currency union. When such a development was discarded, it meant that the countries involved were locked in a marriage where there was no possibility of divorce.
This had profound implications. It meant the weaker countries had to accept the terms imposed on them by the creditor countries, and the terms were “very tough”, Mr Wolf said. Because divorce was almost impossible, the creditor countries had “absolute power” within the monetary marriage.
The measures introduced since the crisis have produced what he calls a “discipline union”, where the euro countries have suffered a major loss of sovereignty.
'Politically intolerable' However, Mr Wolf said, the discipline union was "unworkable, unwise, and politically intolerable". It lacked democratic governance at its centre and a monetary union required democratic legitimacy.
In order to make the marriage workable, Mr Wolf said a number of measures were needed, including greater political integration and a greater degree of mutual support.
Debt restructuring was also needed. Greece needs another debt restructuring, he said, and he was very worried about Italy.
There needs to be a banking union that has fiscal back up, and an ECB that is freer to act.
Mr Wolf said the president of the ECB, Mario Draghi, was a "wonderfully intelligent man" who had done a great job within the constraints in which he operated. The performance of the bank had radically improved since his appointment but the ECB needed to have consensus before it could act.
Multinational structure The bank is a multinational structure that needs to work by consensus because if it emerged that there was a fundamental split in its governing council, the differences would inevitably be seen as "international conflicts".
If the ECB was seen as just another parliament, then its credibility as an institution would collapse.
Mr Wolf said the members of the council have not agreed to act more aggressively because they don’t agree on what the problem is and what should be done.
The need for consensus was the essence of the ECB from the outset. Back in the 1990s only one country really understood what was being created and how the euro zone was going to work, and that was Germany, Mr Wolf said.
Asked who was wearing the trousers in the euro marriage, Mr Wolf said it was “Frau Merkel”. Germany, as the most powerful country and the largest creditor, has a decisive say.
