By Richard Werner, professor of economics at the University of Southampton, and cross-posted from the Real-World Economics Review Blog
In my analysis of the ECB, published first in 2003 as chapter 19 of my bestseller ‘Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy,’ and published in 2006 here, I pointed out that the ECB had not, in fact, been modelled on the Bundesbank, as had been variously claimed.
No doubt, the strong track record of the Bundesbank was the main reason why the ECB’s promoters felt it was beneficial for them to make such a claim. And since the ECB was located in Frankfurt, the psychological connection was suggestive. But as I show in my work, the truth could not have been further from it. To see this, to understand just what made the Bundesbank different and successful, and to understand just which central bank the ECB was in fact modelled on, one has to go back further into history.
The party line pushed by the talking heads and corporate media at the time was that the Bundesbank was so successful, because of its great independence. Hence making the ECB independent meant that the ECB was modelled on the Bundesbank, it was said, and thus would be equally successful in its endeavours. I had warned that this was not the case and that, sadly, under the ECB the euro zone was likely to experience massive bank credit-driven asset bubbles, banking crises and large-scale recessions with vast unemployment. As readers know, this warning of mine from 2003 came to pass almost ten years ago, initially in Ireland, Portugal, Spain and Greece. Today Germany is next in line to receive the ECB’s bubble/bust treatment.
But back to the argument. The official party line that the ECB was modelled on the Bundesbank, was equally independent, and hence was going to be as successful, was based on the simplistic and, in fact, fraudulent, analysis peddled by the European Commission since 1990 (see the commissioned Emerson study ‘One Market, One Money’, here, which claimed that greater central bank independence meant lower inflation. James Forder, Deputy Warden of Balliol College, University of Oxford, debunked these claims, proving that data points were ‘mysteriously’ ‘moved’ and wrong in crucial and much-cited studies. A careful reworking of the actual data – even within the restricted Emerson framework – showed no such link between central bank independence and low inflation. To repeat, there was in fact no evidence that more independent central banks delivered less inflation.
But an even more fundamental problem of the European Commission’s approach was its narrow and unjustified focus on inflation as the sole measure of the success of the policies of the central bank. During the 20th century the biggest problem of misguided central bank policy had not been inflation, but the central bank-instigated creation and propagation of large business cycles, asset boom/bust cycles and large-scale banking crises followed by major economic slumps with vast unemployment. The central bank that had excelled in such activity had been the German central bank, first creating an asset bubble in the 1870s, then large-scale deflation in the 1880s, then hyperinflation from 1923 and in the later 1920s and early 1930s the policies that demonstrably brought Adolf Hitler to power.
When the post-war experts in Germany analysed this surely most disastrous central bank of a major economy in history, they concluded, in my view entirely correctly, that the main problem was the excessive independence of the central bank and its total lack of meaningful accountability to democratically elected assemblies or parliament. For the Reichsbank had been the most autonomous, independent and unaccountable central bank in history. They concluded that the main task in shaping the post-war German central bank, which was to become the Bundesbank, was to REDUCE its independence and make it meaningfully accountable and subject to instruction and supervision from parliament. The formula was a great success and the Bundesbank made history as, in my view, indeed the best central bank in history.
The reader may now understand my concern when I found out that the ECB was, according to the Maastricht Treaty signed in 1993 and its subsequent reflections in European treaties threw overboard this surely most important lesson of German, indeed European monetary history, and abolished the oversight and meaningful accountability that the Bundesbank had to parliament, and adopted point after point of the Reichsbank statutes, which had rendered the Reichsbank since 1923 the most unaccountable central bank in history. The ECB, like the Reichsbank, is not only independent from governments, but independent from any democratically elected assembly or parliament, and according to the ludicrous Article 107 of the original Maastricht Treaty it could even be argued that any criticism or normal democratic debate and attempts by democratic representatives to persuade the leadership of the ECB to adopt sensible policies are ILLEGAL.
This explains why I have argued since 2003 (Princes of the Yen) that the ECB is the REVIVED Reichsbank. The ECB is the most unaccountable and independent central bank in history, whose senior staff are international diplomats that cannot be arrested and whose documents cannot be accessed and audited by any court of audit or public prosecutor in the world – it is above the law, just like the Reichsbank and its sister organisation, the Bank for International Settlements. When the Frankfurt fire brigade thought there was a fire in the former ECB Headquarters, they found out that they would not be let into the building, since it is extraterritorial.
As a result I also predicted that, just like the Reichsbank, the ECB’s decision-makers were likely to abuse such unlimited power, just as Lord Acton, British member of parliament and son of a Bavarian princess, had warned: “Power corrupts. Absolute power corrupts absolutely”. This is why I predicted that the ECB was going to oversee the creation of the vast bank credit-driven asset bubbles (with bank credit visibly ballooning by between 20% and 40% for years in the mid-2000s), which were going to be followed by banking crises and again policy-induced long and deep recessions with vast unemployment…ç