Monday, August 29, 2005

Where is the ECB?

Wolfgang Munchau, one of my favourite columnists at the Financial Times, addresses something I have been wondering about: Why haven't the other central bankers and members of the Eurozone called for Fazio's resignation? He has irrevocably damaged the reputation of the Italian central bank, but doesn't this affect the ECB too?
But this is not an entirely Italian affair. It has implications for the eurozone at large. Most economists and central bankers would agree that integrated financial markets are a prerequisite for a single currency to function properly. The reason is that money needs to flow through the system as efficiently as possible. The European Union is still struggling to create a fully fledged single market for banking and financial services. If Mr Fazio, who is also a governor of the ECB, has protected domestic banks against foreign takeovers, he has acted to the detriment of the eurozone, in breach of his responsibilities.
As life-long governor of the Bank of Italy, Mr Fazio is by extension also a life member of the governing council of the ECB, which sets interest rates for the eurozone. As the Bank of Italy is a participant of the European System of Central Banks and a shareholder in the ECB, it follows that Italy’s commercial banks are indirectly also the shareholders of the ECB.
This is a problem that affects the rest of the eurozone much more directly than would appear at first sight. It constitutes a serious malfunctioning of Europe’s central banking system. This should be of great concern to the ECB. It is possible ECB officials are holding behind the scenes talks with the Bank of Italy. But the ECB’s public silence on this affair is deafening.
Mr Fazio’s loyal supporters have tried to deflect attention by insisting that the real scandal was the invasion of privacy Mr Fazio and other bankers suffered. This is nonsense. These published transcripts have greatly served the public interest because they have given us a unique insight into the close-knit world of banking regulation in Italy.
There is an unspoken rule among central bankers that you never criticise one of your own. Recently, I was listening to a discussion panel chaired by a former central banker and including a current central banker. The former central banker said to the current central banker: "No matter what you are going to say, I shall agree with you."
This is the spirit of central banking, and I suspect it is also the reason for the silence from Frankfurt.
It is true that the European institutions cannot save Italy from itself, but at least giving signs of displeasure would push things along a bit (I would hope). But, as usual, I'm not counting on it.

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