Article Analysis - Assignment Example

Constructing Conceptions of Central Banking Historically Central Banks acted as both bankers and government’s bank. As a government banker, the Central Banks helped in debt management, development programs, currency evaluation and public finances. As a private bank, it facilitated in maintaining banking stability and payment robustness etc. The role of the central banks as a government banker shows its historical links with fiscal policies. Over time, the primary role of the central bank has been confined in framing monetary policies.

Previously, Keynes considered Central Banks as organs of state and instrument of government policy. Central banks role was to maintain economic and financial stability, check states control over currency and manage public finances. Prices of goods and services were fixed under the Keynesian regime. Friedman and Hayek claimed that the central banks should only try to check the powers of governments by controlling the money supply of the economy and framing monetary policies (Marsh, 1992). . All the nations in the EMU under this regime decided to use Euro as their common currency.

The ECB was supposed to formulate the monetary policies for all these nations. The central bank of Germany, Bundesbank has seemed to highly influence the policies set by the ECB. Germany’s strong authorities in the EMU have made other nations suspect the virtues of ECB’s policies towards the economic progress of the EMU. Under this regime the governments of all these nationals had no power to control the monetary supremacies of ECB (Kolb, 2005). Both Super Strong and Extraordinarily Weak The ECB did not make direct public debts purchases and imposed high constraints in public debt financing.

The member states in the EMU were instructed to maintain their budgets in balance or in surplus. If the budget deficit of a nation increased by 3% of its GDP then that nation was penalized under the regime of Excessive Deficit Procedure. Rather no implicit bail outs were offered on the failed government projects. ECB started to act as inflation tighter, while the supreme powers of the Bundesbank made other nations of the EMU hostile. Rather lack of funds started to imbibe economic crisis in the EMU.

‘The same dress does not fit everyone’, the German policies and norms introduced by ECB were highly unsuitable for many nations in EMU. The price stability and structural changes made in the labour market made income distributions inequitable between the European nations and also reduced the domestic demands (Szapary, 2000). ECB Anti-growth Bias and Pre-crisis Performance The ECB’s antigrowth biased monetary policies following the Stability and Growth Policy is actually responsible