From Socialist Voice, July 2010

The role of the European Central Bank in the economic crisis


The European Central Bank controls interest rates in the euro area. During the last decade it kept interest rates low, because the growth in the euro area, especially Germany, was slow. These interest rates were not appropriate for countries like Ireland, where growth was high. What was needed here was high interest rates, to take the steam out of the economy, so there would have been a more reasonable level of growth and lower inflation.
     These low interest rates also increased the speculative bubble in housing. Banks were willing to lend young people more money because, with interest rates low, repayments were low.
     This made high-price properties seem affordable, and so prices spiralled out of control as young people rushed to buy properties with money the banks were giving out as if there was no tomorrow.
     The main policy target of the ECB is inflation of 2 per cent or less. After 2000, inflation in Ireland was significantly above this figure, but the ECB didn’t force the Central Bank to do anything about it. This lack of action allowed the Irish economy to expand too rapidly, contributing to the property spiral and the loss of competitiveness.
     The ECB is supposed to control the amount of money in the euro area; yet during the last decade it permitted the banks in Ireland a rate of lending far above what it would allow in the euro area as a whole. This led to increased lending on property, and the property bubble. It also led to the massive growth in private-sector debt on mortgages and other types of debt.
     Now, after the crisis, the ECB is taking a role, but it is too late for the quarter of a million extra unemployed and all the thousands of households in negative equity, whose borrowings exceed the value of their home.
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