After the bubble burst of the US house market and the financial situation got more and more worst, the European Central Bank (ECB) and the Federal Reserve (FED) were ones of the first banks in the world which reacted immediately by pumping money to the financial market in august 2007.
Until now the ECB injected more than 150 billion Euros to reach liquidity between banks and to keep from bankruptcies in the financial world. Another reaction of the FED was to cut down the interest rates dramatically, in hope to get more money for the banks, but the ECB didn’t follow this example. It raised interest rates from 3.75 % to 4% in June 2007 and ever since it didn’t changed it anymore. The ECB is really observant according to inflation and with this dealing it tries to avoid it. The president Jean Claude Trichet said he will not change the rates because our economic is still relativly stabil; the employment is robust, the unemployment low and the profitability are sustained. Both institutions injecting money to the market to keep business working, but they acting differenty according to cutting interest rates. Thus, the ECB is more focusing on the economic health by retaining the interest rates whereas the FED is reacting directly to the events to avoid a deep recession by repairing the accured damages.
To understand the reason why the ECB is going another direction as the FED you have to look at their mission and structure. The FED is founded 1913 to foster a sound banking system for the USA. The board of Governors which oversee the 12 Federal Reserve Banks in Washington D.C. is made of seven members who are nominated by the president and confirmed by the senates. Thus, the FED is much closed to the USA government and its board members are subordinate under a high pressure to satisfy the government to be voted again and to satisfy the US banks, who have not always the same interest as the government. Thereby the decisions are often emotional rather than rational in a finance point of view.
The ECB is unlike the FED very young it was founded 1998 and is located in Frankfurt. Together with the national banks of the European member states it constitutes the central banking system of the euro area. The ECB is an independent institution according to governments, financial organisations and decision making. The board members (6) are not elected by the national governances and their period is for 8 years. They can only be elected for one period, thus they don’t dare under a pressure from the government. Therefore their decisions can be taken more rational.
A lot of economists complain that the FED is acting emotional and the ECB rational in case of handling the financial crisis. The mission of the ECB is to provide the highest level of integrity, competence, efficiency and transparency. Objectives are high level of employment and sustainable and also non- inflationary growth. There main objective is the stability of prices and with obtaining the interest rates they try to keep the prices stable.
Every 14 days the board of the ECB is holding a conference, the solutions and all important dealings are published to the member states and public. By transferring information’s due to statistics and reports, the involved public trust the system and spend the money to the banks which makes them more liquid in times like today. It also created 16 million jobs till 1999 and the euro is getting stronger and stronger even before the financial crisis. All together the ECB is enjoying a very high confidence and credibility.
At the end the two banks have other backgrounds, so everyone by itself is acting how it best fits for them in this situation and nobody can say which strategy is turning out positively and which one not. So it still will be interesting how the different central banks are dealing with the current financial situation and how deep the crisis, which started as an US property bubble, will effect the whole world economy.
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