The European “Elephant In The Room”

Our current state of financial “chaos” is often credited loosely by commentators to an “asset bubble” fueled by “cheap credit”.

An asset bubble is highly likely to follow an extensive period of cheap credit. So was there cheap credit? There certainly was – in all shapes and sizes.

How does a government control the availability of credit? Usually by monetary policy via the setting of base lending rates by a central bank.

And this is where it all started. In 1999 (from memory) we handed over control of our monetary policy to the ECB in exchange for entry to the new Euro-zone. From that point on our rates were set by a central bank which does not necessarily have our interests at heart.

And the outcome? When we needed higher rates to dampen our growth and asset inflation, the ECB was more concerned about a sluggish Germany economy rather than problems piling up on Irish soil. (That’s not a free pass for our Government by the way – they had many other tools at their disposal to  lance the construction boom but they chose to fuel it instead).

The ECB is dominated by the major European powers – just look at the Executive Board today:

  • A Frenchman
  • A Belgian
  • An Austrian
  • A German
  • A Spaniard
  • One other whose nationality is difficult to determine (!)

How can the Euro work if its a “one-size-fits-all” approach to monetary policy?

In return for 3% by 2014 Ireland should seek radical reform of the ECB with much greater representation on the executive board from smaller & peripheral nations (even if it means increasing the size of the board). We should also seek the decentralization of the ECB Eurotower from Frankfurt to…..Lisbon.

More in future.