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The ECB's seven phases

6/4/12 8:04 AM ET (MarketWatch)Print

LONDON (MarketWatch) -- The 14-year history of the European Central Bank fits neatly into five phases. With the escalation of the crisis, a sixth period seems to have started: the blame game, where ECB puts on display an aggressive form of self-defense.

We may see a seventh phase, where the arrangements covering the single currency are wound up and replaced by something else. For all this, a strong and credible ECB will be needed.

So, even if the euro (EURUSD) runs out of road, the ECB will still be around.

In the last few weeks, ECB President Mario Draghi has repeatedly emphasized the central bank's policy limits and stressed politicians' responsibility to sort out the mess. Even if the euro crumbles, the ECB will ave important roles, for example in guaranteeing European payment systems, more crucial than ever in times of turbulence and uncertainty.

What have been the previous stages? The build-up in 1998-2003 was Phase 1, coinciding with the period of office of the first ECB president, Wim Duisenberg, who had a hard time standing up against the might of the dollar and the skepticism of financial markets.

The second stage, a period of consolidation, came after November 2003 with the appointment of Duisenberg's successor Jean-Claude Trichet. The ECB became embroiled with governments' efforts to rewrite the fiscal rules enshrined in the stability and growth pact. Mind you, the ECB likes to over-emphasize, for its own purposes, the budgetary misconduct of the French and German governments in 2003-04. In those years Paris and Berlin registered average budget deficits of 3.4% of gross national product. Really not a capital offense against economic orthodoxy.

Phase 3 was a period of confident defiance, as the euro strengthened, and Trichet, somewhat incautiously, started to extol in slightly exaggerated manner the status of the ECB itself, for example by proclaiming that he should be termed "Mr. Euro."

This stage was accompanied by an ECB carelessness in allowing the build-up of large and growing euro-area payments imbalances. As former European Commission President Jacques Delors said recently, the ECB's governing council should have used the period of calm before the euro storm to point to potential financing problems.

The fourth phase from 2007 was a period of triumph. The ECB saw off the first excesses of the financial crisis. At the ECB's 10-year anniversary celebration in June 2008 Trichet accused the euro's critics of short-sightedness and pessimism.

With the revelation of the full misery of the Greek fiscal misconduct in 2009, we entered into the fifth stage, the period of crisis, which now seems to be giving way to a new period of mutual recriminations.

What will happen next? Still more than in Greece or Germany, where politicians and electorates cannot break out of mutually reinforced immobility, the future of the euro depends on Spain. It could be that, from now on, it all starts to unravel.

If that's the case, then the seventh stage, the winding up phase, will soon be with us. Mario Draghi's career highlight may still lie in the future.