Europe's Bad Bank

by Mats Persson

Wall Street Journal
June 8, 2011

In 1998, the ECB's president at the time, Wim Duisenberg, boasted that "There is no central bank in the world that is as independent from politics as the European Central Bank." It was on this premise that the single currency was sold to electorates across Europe, particularly German voters. The ECB, they were told, was going to be the Bundesbank reincarnated—the heir to the trusted, wholly independent central bank that uncompromisingly pursued a policy of hard money, low inflation and prudence.

Although not entirely the ECB's fault, it hasn't quite turned out that way. Now 13 years later, the ECB has become both a victim and an accomplice in the euro zone's raging debt and banking crisis. In its attempts to soften the immediate impact of the financial meltdown by propping up insolvent governments and banks, the ECB has put itself on shaky financial ground and may have widened the long-term scope of the crisis.

The ECB is ultimately underwritten by taxpayers, but its vulnerable finances and their potentially huge public costs have not been properly understood or discussed so far. With roughly €81.2 billion in subscribed capital and reserves, compared to about €1.9 trillion in assets, the euro system that underpins the ECB is now leveraged more than 23 times. In contrast, the average hedge fund is leveraged about four or five times.

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