ECB turns 25: From guardian of the euro to crisis manager

The European Central Bank is currently fighting rampant inflation in the eurozone which is just one of the many crises its policymakers have had to face in the past 25 years

The European Central Bank has ushered in a new era of monetary policy in EuropeDeutsche Welle

There are phrases that go down in history as momentous and epoch-making. One of them is made up of a few crucially important words spoken by Mario Draghi, the then president of the European Central Bank, at the height of the eurozone debt crisis in 2012, when he declared the ECB’s determination to defend the euro against financial speculation.

His resounding “whatever it takes” statement made on 26 July, 2012 in London marked the turnaround in the EU sovereign debt crisis as it dispersed the crowd of greedy speculators already waiting to put the axe to the fledgling eurozone riven by the Greek crisis. If Greece were to have gone bankrupt and been expelled from the eurozone, few economists believed at the time the currency area could have survived.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” were Draghi’s famous words — what’s less known, though, are the words he said before that are more important: “And believe me, it will be enough.”

Lost bets and bailouts

Draghi’s words made it abundantly clear to speculators that any financial bets against the ECB would be futile.

What’s followed in the years thereafter has been a show of the ECB’s monetary firepower.

Even before the euro area debt crisis began to rear its ugly head in 2010, the Frankfurt-based ECB had already been buying up eurozone government bonds on the secondary market on a smaller scale. Those asset purchases would be expanded massively later on and lead to the desired result of falling yields for heavily-indebted states such as Greece, Spain, Portugal and Italy.

Falling borrowing costs averted debt defaults and provided the struggling governments on the EU’s southern periphery with new financial room to maneuver.

At the same time, however, the ECB has been forced to take on a role it has not been mandated for — saving national governments with newly printed central bank money, also known as illegal state funding

“This was a major turning point,” says economist Friedrich Heinemann of the European Center for Economic Research (ZEW) in Mannheim. “But to be fair: Mario Draghi saved the eurozone from complete collapse in the summer of 2012,” he told DW.

The statutes of the Maastricht Treaty actually stipulated that euro countries must budget in such a way that they build up enough confidence in the capital markets to get the loans they need at affordable interest rates. The central bank, for its part, was actually only supposed to ensure the stability of the euro, meaning it should only work toward price stability of the currency.

By buying up government bonds from the euro area, however, the ECB has entered terrain that is perilously close to indirect government financing.

Little wonder that the euroskeptics across the bloc openly criticized the ECB. In Germany, for example, conservative and right-wing politicians in 2015 filed lawsuits against the Bundesbank’s involvement in the ECB bond purchases, which were all rejected by the German Constitutional Court.

More powers, more staff

As a result of the euro crisis and the ECB’s new role in fighting them, the central bank has been handed additional powers. It is now tasked with supervising the biggest eurozone banks, and is allowed to run regular banking stress tests on them. In this way, it aims to identify risks in the balance sheets at an early stage and have them remedied.

In addition, during the sovereign debt crisis in Europe, the ECB was part of a group of powerful political players, including the International Monetary Fund (IMF) and the EU Commission. They acted as lenders of last resort providing liquidity assistance to affected states.

As its tasks expanded, so did the ECB’s balance sheet total. In the years between 2010 and 2016, it rose from €163 billion ($151 billion) to almost €349 billion. Last year it stood at roughly €700 billion. The number of employees at the ECB also doubled from around 1,600 in 2010 to around 3,500 today. This article was originally published in German.