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The problems in Spain cannot be denied any longer. In fact, the crisis that hit the Eurozone is something that cannot be hidden.
Since the credit crisis that began in the U.S. a few years ago, countries and their banks have fallen like trees, showing black holes that had been hiding for years, as well as very bad practices that did nothing but make what was already a big problem worse.
Now that the complete rescue is about to come to Spain– the first one was only for the banks, although it counts as government debt– many authors and writers of Spanish newspapers question the competence of the European Central Bank (ECB), and wonder what prevents the ECB from saving us from total disaster by buying public debt of states that are worse off. In these writers’ speeches they explain that the ECB should act as the International Monetary Fund (IMF), and provide financial resources to those who need it.
Are they wrong asking for this? Absolutely. The answer to the question of why the ECB does not act as the IMF is this one: because they are not the same. Despite the fact that, apparently, both agencies have similarities, the truth is the objectives for which they were created are completely different in each one, and the way they respond is not the same. That is why it is advisable to make a couple of clarifications on the differences between the two entities, in order to understand why the ECB is not a “European IMF.” It was not intended to be one.
The IMF was created in a completely different context, when the consequences of the Great Depression could be still felt. Its creation reflected the attempt of several countries to avoid repeating the disastrous measures that weakened economic activity during those years.
Meanwhile, the ECB, successor to the European Monetary Institute, was created in 1998, but it did not make full use of its powers until the entry of the euro in 1999. The creation, established in the Maastricht Treaty, responded first to the oversight of the transition of member countries from their national currencies to the euro and, second, the need for the existence of a bank for this currency.
With these completely different contexts it is logical that the objectives of both entities are not the same. Thus, the main function of the IMF is to oversee the smooth running of international economic policy, and to encourage it, acting as a fund where countries can ask for help when they need temporary financing.
However, the main objective of the ECB is to maintain the price stability in the euro area by maintaining the inflation at low levels, leaving other objectives subordinates to this first and foremost. Broadly speaking, it seems that we can define the IMF as a fund that lends money to countries who need it, and the ECB as that one who ensures the proper functioning of the Eurozone. So, the role of the first one is active, while the second one’s role is rather passive.
Now the big question is: if the euro is not working properly and there is a risk of its disappearance, can the ECB not protect it through the purchase of public debt? The answer is, again, no. Why? Because of the statutes which regulate it.
Since it was created, the ECB defined itself as completely independent from the member countries of the Eurozone– which has been questioned in recent years, especially by the suspect origin of the last directors of the ECB– and the measures should not respond to the national interests of any country. In the same way, the European institutions and national governments are required to respect this independence, and this means that there is no mechanism by which a member state may compel the ECB to act in one way or another.
This is the main reason why the ECB cannot rescue any Eurozone country. Besides this, there is another powerful reason that we forget sometimes: the conditions for being a member of the Eurozone are strict. It is not enough to wish to adopt the currency, there are steps to follow before completing the transition.
The ECB is responsible for safeguarding the proper functioning of the euro because it assumes that other institutions– created for that purpose– have been responsible for verifying that the candidates have the specific requirements for entry. If someone has not, whose fault is it then?
Image Courtesy of eisenrah