Sunday, July 17, 2011

The future of the independence of Central Banks

Only a few countries have Central Banks that are independent of the control of their governments.

The European Central Bank (ECB) was one of the first.

Now that the ECB's Trichet says bank will not back any default Greek bonds, putting him in conflict with the German Chancellor's position, the future independence of this Central Bank will come into question.

My central thesis remains that the European Union will either have to become much more financially consolidated (which everyone will resist as hard and as long as they can) OR the Euro will break up.

The question is: how long will the EU's citizens be happy to continue paying for an unconsolidated financial system, and how long can the EU afford to keep paying for it?

The choices are clear to everyone. No one likes to have to choose between these alternatives, as the cost of either alternative is huge: on one hand, the choice of an unconsolidated financial sysetem which needs to be paid for - and on the other hand the further loss of sovereignty involved in financial consolidation.

As long as the global economy continues to be down, the need for the choice will press ever more strongly - with the pressure points moving from one weak economy (e.g. Greece) to another (e.g. Portugal or Spain or Ireland or Italy or....).

If and when the global economy booms again, the need to choose will become that much less strong.

No doubt, therefore, everyone at the centre of the raging storm is praying that the global economy will boom - but prayer also requires actions - and, in the current case, no one seems prepared to be willing either to introduce a complementary currency or to go for financial consolidation or to break up the Euro.

So we will blunder along in this costly fashion for as long as our political and financial masters can do so, because the status quo (in spite of its disadvantages) represents the fudge that best suits all the actors involved.

But that fudge is coming under pressure with the ECB's declaration, and with the markets' having too much money and few places to put it profitably at the level of risk involved. Sphere: Related Content

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