Watson Institute for International and Public Affairs

Europe's Central Bank as Whipping Boy

November 8, 2011

The Central Bank of the Eurozone (ECB) was compared to a whipping boy of 15th and 16th century Europe in a talk earlier this semester at the Institute by Daniela Gabor, senior lecturer at the University of the West of England's Bristol Business School.

“What has happened to the ECB since 2009 is a modern take on this experience,” she said, describing how a young boy used to be assigned to be physically punished in place of a misbehaving young prince.

There has been a central banking crisis, but the institutional uncertainty spurred by loss of faith in ECB is flaming the crisis, Gabor said. The source of this uncertainty, she said, was “unresolved tension between the policy legacy of ‘sound money’ ideas ... and shifting modes of financial intermediation.”

The sound money principles of central banking – one instrument, one market, and one objective of price stability – must be updated to address the changing nature of financial intermediation, including such tools as liquidity management and various types of short-term market funding. There are unintended and potentially harmful consequences in resisting change, she said.

Above all, “the problem here is that there is no commitment and therefore no credibility,” because both ECB action and inaction contribute to sovereign and bank risk. And there has also been a “repoliticization of central banking” in which the distributional effects of policy choices are more apparent.

Gabor’s lecture was presented by the Development Studies Program.

By Watson Institute Student Rapporteur Brittaney Check ‘12