Planet Money
12:19 am
Fri July 13, 2012

The European Central Bank's Guide to Influence

Originally published on Fri July 13, 2012 3:08 pm

Europe is struggling, thanks to a relentless debt crisis. Compounding its problems: It is not one country, but 17.

Many observers agree that to solve their problems, those countries have to start looking a lot more like one country. And there is a force in Europe trying to make that happen: the European Central Bank. The weapon it has that everyone else lacks? Money.

Princeton Economist Alan Blinder used to work at a central bank, the U.S. Federal Reserve. And central banks don't like to use brute force, he says.

"The central bank is normally contemplative, slow-moving, intellectual, and very polite," Blinder says.

Central banks do have one magic power. They can create money, which is something a lot of countries in Europe really want. The European Central Bank is the only place that can make more Euros.

And so it's using this power to extract concessions from the countries of Europe, says Jacob Kirkegaard, a research fellow with the Peterson Institute for International Economics.

"Throughout this crisis," Kirkegaard says, "the ECB has provided financial support only when the governments have committed to hand over more of their national sovereignty."

Did you get that? The ECB only gives you money if you give up some of your independence. The ECB says to the Greeks, for example, "You can't collect taxes the way you're doing it, it's ridiculous. You've got to get better." To the Spanish: "Your government can't spend so much money. Cut back."

Thanks to its unusual powers, the ECB has succeeded in forcing European governments to do things they otherwise might not have.

First example — August 2011: The Italian government couldn't find anyone to lend it money. It went begging to the ECB. The president of the ECB sent a secret letter to Italy, to prime minister Silvio Berlusconi.

It was leaked online a few weeks later. It gave Berlusconi a long list of reforms he would have to carry out in return for the bank's support.

Italy eventually adopted the reforms. The ECB helped Italy out. As part of the process, Berlusconi was forced to resign and economist Mario Monti took over. Blinder says it was a pretty bold move for a central bank — particularly this one.

"I was mainly surprised at how frank they were about it," Blinder says. "Central banks are not known for their frankness, and Europeans are low on the frankness scale."

Second example — last December: Various southern European countries are scrambling to borrow money. The European governments make a fiscal pact, promising to cut spending — and, crucially, to send each of their national budgets to a team in Brussels for approval. And then, without much fanfare, the ECB comes through with the money.

And the debt crisis quieted down. For a bit.

Recently, though, it's heated up again. Also, in the last few weeks, the ECB has launched a new campaign. Lately, every time a governor from the ECB appears in public, they talk about the need for a banking union.

And what's happening now in Europe? No longer will Greeks run Greek banks, and Italians run Italian banks however they want. Now there will be one regulator in charge of all the banks across the continent.

Now, it could prove dangerous to force countries to the brink in exchange for money they need. On the other hand, a lot of the changes they're making are changes they've needed to make for a long time, many observers say.

The European Central Bank didn't want to comment for this story. They don't really like discussing their plans; their actions speak for them.

But with this new centralized banking union, the ECB seems, once again, to have pushed these very different countries closer together.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

Europe has been in trouble for awhile because of its relentless debt crisis. The difference between China's economic fix and Europe's? China's is one country, the eurozone is made up of 17 countries. Many observers agree that to solve the eurozone's problem those countries have to start operating more like a single country. And there is a force in Europe trying to make that happen. It's the European Central Bank. Here's Zoe Chace from our Planet Money team.

ZOE CHACE, BYLINE: Economist Alan Blinder used to work at a central bank - the U.S. Federal Reserve. And he says central banks don't usually like to use brute force.

ALAN BLINDER: The central bank is normally contemplative, slow-moving, intellectual, and very polite.

CHACE: But they do have one magic power: they can create money. Something that a lot of countries in Europe, right now, really want. And so, says Jacob Kirkegaard with the Peterson Institute, they're using this power to extract concessions from the countries in Europe.

JACOB KIRKEGAARD: Throughout this crisis, the ECB has provided financial support only when the governments have committed to hand over more of their national sovereignty.

CHACE: Did you get that? The ECB only gives you money if you give up some of your independence. The ECB says, for example, to the Greeks, you can't collect taxes the way you're doing it, it's ridiculous. You've got to get better. To the Spanish, your government can't spend so much money. You've got to cut back.

KIRKEGAARD: Because it is so uniquely powerful, the ECB has actually been able to force European politicians to do a lot of the things that they otherwise wouldn't do.

CHACE: Examples. One, August 2011, the Italian government couldn't find many people to lend it money, and it went begging to the ECB. The president of the ECB sent a letter over to Italy, to prime minister Silvio Berlusconi. A secret letter that was leaked online a few weeks later.

KIRKEGAARD: And that letter basically said to Berlusconi, look, we would really like to support your government and Italy in the financial markets, but in order to be able to do that, here is a very long list of domestic reforms you need to do.

CHACE: Italy eventually adopted the reforms. The ECB did help Italy out. As part of the process, Berlusconi was forced to resign and economist Mario Monti took over the country. Blinder says it was a pretty bold move for a central bank - particularly this one.

BLINDER: I was mainly surprised that they were as frank as they were about it. First of all, central banks are not usually frank. You don't associate frankness with central banks. Secondly, within the world of central banks, the Europeans are low on the frankness scale. It's a low standard, and they're low.

CHACE: Nevertheless, example two. December last year. Again, various southern countries scrambling to borrow money. The European governments make a fiscal pact, promising to cut spending, and, crucially, send each of their individual budgets to a team in Brussels for approval. And then, without much fanfare, the ECB comes through with the money. Here's Jacob Kirkegaard again.

KIRKEGAARD: You basically waited until you had the right politicians in power.

CHACE: And the debt crisis quieted down for a bit. Recently though, it's heated up again. Also in the last few weeks, the ECB has launched a new campaign. Lately, every time a governor from the ECB appears in public...

KIRKEGAARD: They have all talked about the need for a banking union.

CHACE: And what is happening now in Europe? No longer will Greeks run Greek banks, and Italians run Italians banks however they want. Now there will be on regulator in charge of all the banks across the continent. Now, it could be dangerous to force countries to the brink in exchange for the money they need. On the other hand, a lot of these changes they're making are changes many observers say they've needed to make for a long time.

KIRKEGAARD: If you are running the risk of being insolvent, well, you know, maybe you could start to think about these things.

CHACE: The European Central Bank didn't want to comment for this story. They don't really like to discuss their plans. Their actions speak for them. But with this new centralized banking union, the ECB seems to have once again pushed these very different countries closer together, Zoe Chace, NPR News. Transcript provided by NPR, Copyright National Public Radio.

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