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

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According to a report put out by the European Central Bank on Wednesday, May 30, 2012, none of the eight countries that are waiting to join the euro currency are ready. Most countries in the group have only been waiting since 2004 or 2007 but Sweden has been waiting since 1995.

Bulgaria, the Czech Republic, Latvia Lithuania, Hungary, Poland, Romania, and Sweden are the eight countries that are members of the European Union but are not a part of the Eurozone – meaning they are not using the euro as their currency. Seventeen countries are currently using the euro, including Greece, although there have been discussions that it may have to leave the Eurozone. Currently the United Kingdom and Denmark are not using the euro either – instead they are using the pound sterling and krone respectively – but the decision to not use the euro was theirs, not the European Central Bank’s.

The United Kingdom opted out of the euro by negotiating an exception within the Maastricht Treaty of 1992. Joining the euro was heavily opposed by most of the United Kingdom, although its close neighbor, the Republic of Ireland, has adopted the euro. Denmark was able to opt out of the euro as one of the four conditions of the Edinburgh Agreement in 1992.

The European Central Bank must report on the progress of these eight countries every two years. So far it appears as if only Latvia will be able to join the euro currency by the next assessment in 2014. According to the bank, “in none of the eight countries examined, [is] the legal framework fully compatible with all requirements for the adoption of the euro.” They also claimed, “incompatibilities remain regarding central bank independence” in all of the countries.

Additionally Latvia and Lithuania are the only two countries of the eight currently taking part in the exchange rate mechanism II for more than two years which is required to be a part of the Eurozone.

Many of the countries’ economies are doing better than current eurozone countries. Seven of the eight countries – the exception being Hungary – have a debt-to-GDP ratio under 60% which is the Eurozone limit. Currently Greece’s ratio of debt-to-GDP is 165.3% and Italy, Ireland, and Portugal had ratios last year above 100%.

According to a statement from Prime Minister Donald Tusk of Poland earlier this May, Poland is still interested in joining the Eurozone even though the euro has been damaged by the current debt crisis.

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