If You’re Going To Build Another Fed, Build It Better

The latest European accord includes provisions for restructuring the banking system that would give the European Central Bank (ECB) powers similar to those of the Federal Reserve. That’s the sort of thing that central bankers dream about, so warnings from ECB President Mario Draghi are most surprising.

At issue is the desire of eurozone leaders to have the ECB “play a central role in banking regulation as part of a broader effort to harmonize supervision across the currency area” while continuing to play its principal role of conducting monetary policy, says the Wall Street Journal.

In essence, Draghi is concerned about expanding the ECB’s powers. To preserve the bank’s credibility he called for strong protections to be implemented before the bank is granted supervisory power.

One of the most commonly voiced concerns with sole supervisory power is that the ECB might bend to pressure for lending to ailing banks throughout Europe, setting off inflation. “Any new task in the supervisory area should be rigorously separated from monetary policy tasks … there should be no contamination between the two areas,” Draghi said.

Supervisory responsibilities are currently shared among 14 of the 17 national central banks and creating one centralized bank supervisor would tend to strengthen the economic union. It is also a precondition for direct recapitalization of banks through the rescue fund, which will enable countries to acquire funds for their troubled banks without incurring further sovereign debt.

Draghi also warned about the danger in rushing to meet the year-end deadline set by the accord. “I would not dramatize too much the need to do things fast,” he said.

“We all want to have everything well done now,” Draghi said. “I would rather choose something that is well done, and then we can cope with the rest because we know it isn’t going to be a drama if it’s two or three months later.”

If the EU is in fact recreating the Fed, at least a few of its members seem willing to learn from our experience. It behooves us to pay close attention to those voices of reason over the next several months.

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