Politics follow the money – the ECB’s fate

History contains many examples of what happens when politicians gain control over the currency. Few of them end well. In a not very convincing way, the European Union’s heads of state and governments have chosen a new leadership team at the Union level. The most powerful appointment was probably not the new president of the European Commission, but the nominee to lead the European Central Bank– the guardian of the single currency.

Christine Lagarde
Christine Lagarde. (source: dpa)

Ever since money was invented, governments have tried to control it. That means mankind has a long history of monetary devaluations, which happen whenever the ruling authorities see an easy opportunity to finance their political or bureaucratic objectives.

Stabilizing factor

The gold and silver content of specie was ordinarily a stabilizing factor, though we have seen its debasement even in Roman times, through the admixture of copper. This practice had an inflationary effect. The one big exception was during the 16th and 17th centuries, when the Spanish Empire discovered such abundant gold and silver in the Americas that its very oversupply inflated prices. Since then, however, gold production has remained quite stable.

In the case of fiat money, the stabilizing factor is the issuing central bank, which must strike a balance between preserving the value of the currency and supplying enough money to ensure economic liquidity. Fiat money is a currency that is not backed by underlying collateral, such as precious metals, but by the trust people have for the emitting institution. Today, for most of Europe, this institution is the ECB, whose primary duty is to preserve the value of the euro …

U.S. President Donald Trump’s recent visit to the United Kingdom and Normandy, France, for the 75th D-Day anniversary was instructive in this regard. In the UK and the president’s subsequent short visit to Ireland, the American leader made clear once again that the U.S. strategy for dealing with the transatlantic community is not centered on the European Union. That is crucial for Germany, which continues to remain a dominating force in EU policymaking …

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Politics follow the money


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