The ECB celebrates 25 years marked by the containment of inflation and crises

by time news

2023-05-24 00:28:59

The European Central Bank (ECB) celebrates 25 years marked by the fight against inflation and efforts to maintain financial stability in the Eurozone. The body, which was born as an experiment to apply a common monetary policy to European countries, has gone through several stages; of illusion and consolidation, but also of numerous crises (the financial one of 2007, the pandemic…). The Eurobank, which is now trying to curb the inflation triggered by the war in Ukraine, will hold a commemorative event this afternoon at its headquarters in Frankfurt, which will be attended by representatives of all the euro countries.

Consolidation and arrival of the euro

The 1993 Treaty on European Union included the creation of an Economic and Monetary Union. What at first seemed like an unattainable dream began to materialize thanks to the preparatory work of the European Monetary Institute, the germ of what would later become the ECB. In 1998, the Eurobank was created with the intention of helping eleven countries – Germany, Austria, Belgium, Spain, France, Finland, Ireland, Italy, Luxembourg, the Netherlands and Portugal – to transition to the euro, which gave the organization their monetary sovereignty.

The original idea of ​​a common European currency was born in the 1960s, but it did not materialize until 2002 due to political and economic differences between the Member States. The euro sought to boost financial and commercial capacity inside and outside the EU, streamlining cross-border trade and giving monetary stability to the Eurozone.

And 21 years later he has succeeded. “The euro has made us stronger. Since the adoption of the single currency, we have been better equipped to deal with crises”, assured the president of the ECB, the French Christine Lagarde, to EL CORREO on the 20th anniversary of the common currency. Around 341 million people in 20 countries use it today, being the second most used currency in the world.

Economic crisis and great recession

The 2007 financial crisis was the ECB’s first major litmus test. The US financial bubble burst with the fall of Lehman Brothers and the then ECB president, Jean Claude Trichet, reacted by raising rates to 4.25% to combat inflation –then 4%–. He did it in a context of economic weakness and when the US Federal Reserve had already begun to cut interest rates, choking the European economy. To date this decision is considered the biggest mistake in the history of the ECB.

In 2008, finally, Trichet gave in to the voices –especially from the south of the Eurozone–, which asked him for a rate cut and announced a reduction of 50 basis points, to 3.75%.

He rescues Draghi

The economic crisis revealed the weakness of the sovereign debts of some euro countries such as Greece, Italy and Spain. The ECB and governments designed unprecedented bailouts and stimulus, but huge imbalances in the Eurozone threatened to break up the monetary union. In 2012, with risk premiums skyrocketing and with no apparent sign of slowing down, the president of the organization, the Italian Mario Draghi, uttered his famous phrase: «The ECB is willing to do whatever it takes to preserve the euro. And believe me, it will be enough.” The stimulus policy and the purchase of public debt by the ECB did the rest, managing to stabilize the risk premium and calming the markets.

The Lagarde era and the pandemic

The arrival to the presidency of the organization of the French Christine Lagarde in November 2019 predicted a continuation of Draghi’s accommodative policy. However, the covid-19 pandemic was one of the biggest economic ‘shocks’ since World War II. In March 2020, the ECB announced a stimulus of 870,000 million euros in the purchase of public and private debt under its Pandemic Emergency Purchase Program, which it would later expand to 1.85 trillion.

The gradual end of the stimuli, in July 2022, gave way to rate hikes. The ECB closed a cycle and took out all its weapons to counter the inflationary pressure as a result of the Russian invasion in the Ukraine. Eurozone prices reached a record high of 10.6% in October. The rate increases (up to the current 3.75%) have managed to bend the rate to 7%. All in all, the recent financial turmoil has led the entity to moderate these increases, but Lagarde has already warned that the cycle of increases has not yet ended.

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