The ECB monetary policy dilemma

There is in Europe a widespread contempt in judging the ECB’s current monetary policy decisions, almost as if virtually any economist, analyst, student or politician could fare better than a panel of respected central bankers.

Critics are of all kinds: the advocates of a dual mandate condemn its decisions as too hawkish, while many fiscal conservatives, mostly in northern eurozone countries, strike the ECB as being too dovish. Moreover, many citizens in the currency bloc, frustrated by economic hardship, high unemployment and rising poverty and helped by shameless politicians, complain that the central bank is a mysterious object, which is governed mostly by obscure forces whose only aim is to destroy national governments.

In all of this turmoil, the ECB’s Governing Council has to fulfill its mandate of maintaining price stability by choosing a one-size-fits-all monetary policy for eurozone countries that are in very different economic cycles, that have different economic fundamentals and whose fiscal policies are apparently similar (austerity is the key word), but in in their effects substantially different.

In the past ten years, the national bias in the ECB Governing Council has greatly diminished: but that did not happen without fall-outs, as two German members resigned and fostered the intervention of their Federal Constitutional Court when the Outright Monetary Transaction program was launched by Draghi’s presidency. A strict mandate, which the ECB has also in a way outflanked, completes the picture and increases the difficulties of “governing” the Euro.

Yet, given the enormous obstacles, the ECB has fared pretty well: its efficiency in delivering quick decisions, compared to the dysfunctional mediocrity and powerlessness of other EU institutions, has saved the eurozone from collapse. Its federal structure, conceived with the aim of preserving its independence, has avoided gridlocks and the veto threats that plague other EU decision making structures.

While from an economic standpoint it would be great if the ECB could do quantitative easing, de-sterilize the SMP program or impose an LTRO that would automatically transfer to SMEs in the south of the Eurozone, all these measures would need strong political backing (as a matter of fact, they were extremely controversial even when launched by central bankers who only had to deal with one Parliament…). But more important, there can be no substantial improvement in the economy of the eurozone without a serious, federal fiscal policy that works for all member states and not only a few. Such a step, we all know, is blocked by lack of political will by the eurozone members and would perhaps require treaty changes.

In the current political framework, the ECB can only hope that deflation brings down labor cost in the south of the Eurozone and inflation brings consumption and investments up in the north, so that the south of the Eurozone becomes more competitive even within its borders. And again, taking into consideration that Germany has no intention to increase public spending or to boost consumption, the ECB has to pray for an export-driven recovery that is all but guaranteed.

All in all, if you dig deeper in the criticism of the ECB’s monetary policy decisions, you end up appreciating the Governors’ and Board’s bravery in facing the conundrum of managing a central bank without a state. Eventually, the central bank’s decisions are fundamentally not understood nor shared by anyone in the eurozone – and they indeed displease everyone – because the ECB acts on the basis of the interest of a polity that does not exist. Indeed, the ECB is way ahead of its time in representing a community of roughly 300 million people that, however, keeps thinking along national lines.

Despite what many market operators tend to believe – or hope – the ECB is unlikely to move into uncharted territory next year: its creativity is limited by the lack of a political power backing its decisions and moving eurozone fiscal policy into the same direction. But it is extremely unfair to picture it as the responsible for either the crisis or the very slow exit from it.

Alfonso Ricciardelli

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