19 September 2013

Stefan Collignon: The various roles of the ECB in the new EMU architecture

Collignon writes that although the ECB has emerged as the single most decisive and most successful player among all European institutions during the crisis, this is not sustainable over the long run.

This Briefing Paper was prepared for ECON's Monetary Dialogue

Although the ECB’s role is perfectly compatible with the Treaty on European Union (TEU), it is not sustainable over the long run for economic and political reasons:

• A whole range of new institutions and procedures have been created and the complexity of the euro area’s governance has become more opaque;
• The role of institutions should be derived from their functions. The central bank is the bank of banks. This creates a clear division of tasks: the central bank gives credit to banks and banks give credit to the rest of the economy;
•  The central bank must monitor the creditworthiness of banks, and commercial banks have to monitor the creditworthiness of their clients. In this architecture it makes no sense to ask the European Central Bank to grant credit directly to SMEs or governments;
• The central bank must guarantee the convertibility of bank deposits into money and therefore act as lender of last resort to the banking system, not to governments;
• Europe’s regulatory gaps create incentives for regulatory arbitrage, which is a manifestation of collective action failures generated by Europe’s institutional architecture.

Full Briefing Paper

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