In the past, it acted more like an enlarged version of the German Bundesbank, devoted exclusively to price stability through inflation control. Like the Federal Reserve, it is now willing to “do whatever it takes” to overcome the effects of chaotic financial markets as it supplies banks with liquidity and purchases government bonds from fiscally troubled countries in the euro area.
This willingness to act and the ECB’s unique position as a supranational central bank – not beholden to any individual government – gives it unprecedented leverage over reform in individual euro-area capitals.
Like the International Monetary Fund – a knight that rescues economies but only if they carry out needed reforms – the ECB in July demanded additional fiscal austerity and labor market reforms from Italy in return for bond purchases of Italian government debt.
That the ECB has made its crisis decisions despite the dissent of Germany, i.e., overruling the euro area’s most powerful nation, shows it can act in a truly Pan-European fashion – even while politicians argue on behalf of their national interests. Europe will need such a strong, independent bank if it is to finally exit from the debt crisis.