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The European Central Bank - Essay Example

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The European Central Bank (ECB) is one of the banks under the European System of Central Banks (ESCB), along with the national central banks of the European Union (EU) member states which have not yet adopted the euro. It was established in 1998 replacing the European Monetary Institute…
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From the moment of its inception, the European Central Bank has been a favorite target of criticisms from economists and political leaders alike. Surprisingly, among its staunch critics are European countries themselves which suffer economically because of the oftentimes rigid and unreasonable policies ECB follows.
This paper will thus examine how the political and economic world perceives the performance of the central bank in this regard. Commentaries from analysts, studies done by independent economic research bodies, and the media will be the three main sources for this research.
"The list of challenges is long and a lot of work lies in front of us." This was the concluding statement of Gertrude Tumpel-Gugerell, member of the ECB Executive Board during a speech on a conference in Vienna, Austria in 2004. However, she was optimistic that the system would be able to handle challenges that would be present along the way. (ECB, 2004)
Among the many challenges present is how to balance decision-making with regards to rate increase to benefit all the economies of the EU member states. Because the ECB does not only cater to a single economy, it has this inherent challenge. An increase in rate would mean a negative effect on a country with a growing economy while it is a positive move for a country with a high inflation rate. The GoCurrency website cited that "several larger economies in the euro area (Germany, for example) that were recently coming out of an economic slump were unhappy as the higher rates would stunt their growth."(GoCurrency, 2006)
One classic example often mentioned by analysts is the effect of low interest rates in countries with property bubbles such as Ireland. Because "the ECB was keeping rates low to help the stodgy economies of France and Germany, where growth was weak and needed nurturing, the need of the Irish to raise rates to help their already ailing economy is not addressed". (Louth, 2007)
With the recent slump in mortgages in the American market, ECB is once more in the dilemma of raising rates in September or not. It should be noted that this is the first time since September 2001 that there is a proposed increase in rates. (MECB Update, 2002, p 3)
Jean-Claude Trichet, President of ECB, indicated in August that the ECB "will raise its key refinancing rate to 4.25 from 4.0." (TodayOnline, 2007) However, there has been pressure from the world community to halt this intended rate increase.
The article that appeared on the Business World website entitled "NCB: Another ECB hike could be risky", quoted NCB analyst Dermot O'Brien as saying that the credibility of the ECB may be in question if it does not proceed with the intended rise in rates and sticking to its original plan would be seen as immature stubbornness. This is the current dilemma. (Business World, 2007)
With the "surprisingly weak growth figures for the ...Download file to see next pagesRead More
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