ECB debates switching course before change of helmsman

Wealthy countries in the eurozone have often accused the ECB of penalising savers with its negative rates, which they argue also risk allowing bubbles to form in financial or property markets. — AFP pic
Wealthy countries in the eurozone have often accused the ECB of penalising savers with its negative rates, which they argue also risk allowing bubbles to form in financial or property markets. — AFP pic

FRANCFORT, May 24 — Politics will have an unusually large role in picking a new chief for the European Central Bank (ECB) this year, as the switchover coincides with European Parliament elections and the choice of a new Commission.

But beyond the horse-trading over the right person for the presidency, some policymakers and observers are debating whether the Frankfurt institution needs new priorities after 20 years in operation.

“Good luck stepping into the shoes” of 71-year-old Mario Draghi after he leaves in October, a European source speaking on condition of anonymity told AFP.

The Italian has shepherded the eurozone through eight years of crisis with sometimes dramatic steps, as well as seeing off frequent political challenges to the central bank’s independence.

He has extended the bank’s “toolbox” of options for supporting the economy with trillion-euro stimulus programmes and negative interest rates.

And with “forward guidance” about future policy, the ECB now communicates more clearly and forcefully with markets about how it will pursue its price stability target.

One widely tipped candidate to succeed Draghi, Bank of Finland governor Olli Rehn, believes the central bank must evolve further in the years to come.

“A review of the ECB’s monetary policy framework would prove useful,” touching on “those very assumptions, principles and instruments that the ECB uses in its pursuit of price stability,” he said last December.

Such a move could mean the ECB “walking in the footsteps of the US Federal Reserve, which is currently running a review of its monetary policy and its tools,” Eric Dor of France’s IESEG School of Management noted.

Missed target

In 2003, policymakers placed a number on their mandate from the EU’s treaties to pursue “price stability”, judging that inflation just below 2.0 per cent over the medium term was most favourable for jobs and investment.

Since then, the ECB has leapt into the breach to confront the financial crisis and the ensuing sovereign debt crisis.

Draghi promised in 2012 to do “whatever it takes to preserve the euro”.

Seven years later, no country has left the single currency bloc and public support for the euro is at its highest-ever level, according to Eurobarometre polls.

But on inflation, the ECB has fallen short of its target over most of that time, despite its massive interventions designed to boost economic expansion and, indirectly, price growth.

“A new president would have the opportunity to start a debate” on monetary policy, which has been “widely criticised” in recent years, said Paul de Grauwe of the London School of Economics.

Wealthy countries in the eurozone have often accused the ECB of penalising savers with its negative rates, which they argue also risk allowing bubbles to form in financial or property markets.

It may be the case that “in an increasingly globalised world” even a major-jurisdiction central bank has less of a grip on inflation, said Marcel Fratzscher, president of the Berlin-based DIW think tank and a former ECB staffer.

That could call into question a tunnel-vision approach targeting inflation alone, he added.

Treasury backing needed?

Services, characterised by fierce competition and low salaries, are increasingly dominant over industry in the economy — potentially keeping a lid on price growth, ECB board member Benoit Coeure observed recently.

In future, “do we want to go towards a dual strategy like the Fed, based on prices and jobs?” asked DIW’s Fratzscher.

Some experts argue for an alternative double target of “both real growth and inflation”, IESEG’s Dor said.

Meanwhile the ECB could broaden its horizons to preventing financial bubbles and supervising investment funds — as it has done for banks since 2014 — or adding to the range of interest rates under its control, like the Bank of Japan.

Academic debates aside, any renewal of eurozone monetary policy “will be determined by conditions in the economy and on markets,” LSE’s de Grauwe said.

Ultimately, if it is unable to increase inflation alone, the ECB must be backed by “a more expansionary fiscal policy by the member states,” he urged — putting the ball back in the court of Europe’s elected leaders. — AFP

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