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Virtual currency, central bank and governments

On 18 June, Facebook announced its plans for Libra, its digital currency, at the U.S. Mint in San Francisco, the hotspot for the gold rush in the 19th century.  This new currency is expected to launch during the first half of 2020. Mark Zuckerberg’s idea is simple: “Make it as easy to send someone money as it is to send a photo.”

In his column in the weekly Le Point, Nicolas Baverez had this to say: “Facebook is disrupting the sovereign function of countries, which is to issue and control currency.” And, he added, “Facebook is getting a head start on the other GAFAs with this plan, with a full frontal attack on the strong profit margins of the financial sector. It is fully aware of the implication that, while banking and insurance services are basic necessities, banks and insurers are not necessarily indispensable.” This is an analysis that echoes the issues confronting European countries about the role of the European Central Bank.

 

Since 1998, the Frankfurt-based institution has closely monitored price-stability in the euro zone, an action made more complex given the heterogeneity of the European economies. “A beacon in the night. That is how the usefulness of the European Central Bank could be simply summarised in the European economic landscape,” as Le Figaro framed the debate surrounding the institution. This institution replaced the European Monetary Institute and claims to be one of the chief means for maintaining-or at least trying to better maintain-price stability in the eurozone countries.  The ECB, created under the Maastricht Treaty in 1992, has a shady side for a lot of Europeans, as its actions can seem complex and abstract.  And, Le Figaro continues: “In reality, the institution manages the single currency, and determines and implements the EU's economic and monetary policies.

 

Specifically, the European Central Bank sets “the interest rates at which it lends to the commercial banks in the euro zone”, explains the European Union's official site. It's a system that regulates the money supply in the euro zone and controls inflation. In this respect, the institution ensures, through its actions on the benchmark rate, that the inflation rate is close to 2%. This figure is set by the ECB to address a variety of issues.  Inflation that is too high would reduce purchasing power. Conversely, inflation that is too low could unleash deflation, the widespread and self-sustaining decline in prices. But maintaining control can be tricky because of the heterogeneous economies in the euro zone. A benchmark rate too high risks slowing the growth in less vibrant countries, and a rate too low encourages inflation in countries with sustained growth. It’s all a matter of balance.

 

When rate action is insufficient, the ECB has other arrows in its quiver to try to control price swings. One of them involves buying securities, which has been widely done since 2015 to keep deflation risks at bay. Le Figaro elaborates:
“This method, called quantitative easing (or QE), is  based on creating money by buying government or private debt on the market held by member bank investors. The goal is clear: the latter reinject the liquidity they obtain in exchange into the economy, by lending to households and companies which, in turn, should stimulate growth and inflation. Besides these actions, the ECB also acts as a supervisory institution. In this regard, it must ensure the security and stability of the European banking system as well as control financial institutions and markets.”

 

While European leaders reached a consensus on Christine Lagarde to succeed Mario Draghi, the latter will have to deal with the three main bodies of the institution to oversee the euro zone.  The new President will be supported by the General Council, which acts as advisor and coordinator; the Executive Board, which provides the day-to-day management of the central bank, and the Governing Council.

 

And, Le Figaro concludes, “This is considered to be the most important body. Composed of six board members and governors from the central banks of the eurozone countries, the Governing Council determines the ECB’s economic and monetary policies. There is no doubt that the first woman at the helm of this flagship institution will have her hands full.

 

Christian Moguérou

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