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The European Central Bank (ECB) is a truly independent central bank,
even more so than the Fed. Its only mission is price stability -- it
doesn't have the other economic goals that most advanced economies
expect, like fighting unemployment. There is no political supervision of
any kind -- no equivalent of AG appearing before Congress. Its minutes
are not required to be published.
No one knows if this kind of system can work. It has never been tried on
this scale in history. The working asumption is that there will be
problems, but that the focus of the ECB will be to keep rates low in the
interest of price stability. Increased volatility and low interest rates
usually means a weak currency.
On the other hand, the lack of risk between Euro countries provies an
incentive for companies to hold euro assets and liabilities. For example
a multinational with a profitable subsidiary in Germany looking to build
a new plant in Spain used to hedge both activities separately. Now the
German profits can 'fund' the Spanish investment without any need for
hedging currencies. Since hedging becomes easier, there should be more
willingness to hold euro-denominated assets and make euro investments.
Regards
Dan Goncharoff
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