Only a few years ago, the European Central Bank was regarded as relatively powerless when compared with its counterpart in the United States. But as it has struggled to hold the eurozone together, the bank has become more like the Federal Reserve. And that was on view at this weekend’s conference, as top central bankers and economists gathered to discuss economic issues that extended beyond the bank’s mandate of containing inflation.
The title of the two-day gathering “Inflation and Unemployment in Europe,” offered a clue (With the eurozone’s unemployment rate at 11.3 percent).
The European Central Bank’s charter does not prohibit it from taking unemployment and other factors into consideration when setting interest rates. But unlike the Fed, which has a broad mandate to fight inflation, contain unemployment and ensure moderate borrowing costs, the European Central Bank is required to make price stability its top priority, incorporating other concerns only if they do not interfere with the prime directive.
All of the major central banks expanded their monetary policy arsenals after the financial crisis. In March, the European Central Bank followed a precedent set by the Fed and began buying tens of billions of euros worth of government bonds, a form of money printing intended to raise inflation closer to the official target of nearly 2 percent and stimulate the eurozone economy.
Mario Draghi, the president of the central bank, disputed that the European Central Bank had expanded its mandate. But he agreed that the bank had evolved substantially. “The crisis changed forever the E.C.B.,” Mr. Draghi said at the conference. “The mandate is always the same, namely price stability in the euro area,” he said “But the instruments had to change.”
The expansion of the European Central Bank’s powers began under Mr. Draghi’s predecessor, Jean-Claude Trichet, who was also vocal in advising governments. But in monetary policy, Mr. Trichet stuck close to the playbook inherited from the German central bank, the Bundesbank, with its fixation on price stability.
The actions of the European Central Bank have been crucial in holding the eurozone together, especially when political leaders could not agree on actions. Mr. Draghi drew criticism at the conference, though, when he called for tougher measures to ensure that political leaders do more to improve the performance of their economies. While he did not fault any individual eurozone countries, he said that leaders needed to be bolder in dismantling regulations that prevented entrepreneurs from starting businesses and made it difficult to dismiss unwanted workers. Such action should be a condition of eurozone membership, he said.
“What do we say about things that aren’t under our control but that matter from the viewpoint of the economy?” Mr. Fischer said during a panel discussion. “The answer is, you can talk about it from time to time, but you can’t make this your main talking point.” Top officials of the Fed are more restrained in advising American political leaders. Stanley Fischer, vice chairman of the Fed, said at the conference that if central bankers told elected officials what to do, the elected officials would be emboldened to meddle in monetary policy.
But unlike the United States, the eurozone has no strong central government and few programs that automatically transfer money to economically distressed countries like Greece. No Europewide unemployment insurance exists, for example. The European Commission has limited power to coerce national governments to make changes economists say are necessary, but that are unpopular with voters or powerful interest groups.
Mr. Draghi said the European Central Bank had trouble doing its job because eurozone governments had not done enough to promote growth. Therefore he has a duty to speak up, he said. “Central bank governors,” he said, “should be quite clear about policies, or lack of policies, that hamper their mandates, that make their mandates more difficult or impossible.”
A full implementation of all our monetary policy will provide the necessary support to our economy. Thus, effects of these monetary policy measures work their way through to the economy, contributing to economic growth.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively. Given continued high structural unemployment and low potential output growth in the euro area, the ongoing cyclical recovery should be supported by effective structural policies. In particular, in order to increase investment, boost job creation and raise productivity, both the implementation of product and labour market reforms and actions to improve the business environment for firms need to gain momentum in several countries. A swift and effective implementation of these reforms, in an environment of accommodative monetary policy, will not only lead to higher sustainable economic growth in the euro area but will also raise expectations of permanently higher incomes. Therefore, Mr. Draghi is right!
Update 3 June 2015
ECB decided to keep the key ECB interest rates unchanged.