In January 2020 Christine Lagarde announced that the ECB would be conducting a year long review process of its monetary policy and remit. Much has happened since its last review in 2004, and GPI has responded to Lagarde’s ambitious agenda. The 55 page GPI report[1] reviews the development of ECB monetary policy over the past 30 years and concludes that radical reform is needed to enable the Eurozone to escape from the economic doldrum where it has been languishing during the past decade.
Modern monetary policy has developed considerably since the launch of the European System of Central Banks and the ECB in 1999, as has the overall global economic situation, especially since the GFC. Economic growth – with low productivity, low growth, and low inflation – is still substantially dependent on the bank financing of company investment. Hence, the liquidity of the banking sector is a necessary, though not a sufficient, condition for medium-run economic growth. The report argues that fiscal policy is an essential accompaniment both at Member State level and at central EU/EZ level. The burden of macro-economic policy at EZ and more widely at EU level cannot rest solely on the shoulders of the ECB.
In the absence of a formal fiscal capacity and policy, ECB monetary policy has become technocratic and over-complex, with new policy instruments being used in an interactive manner to support economic growth, though ostensibly constrained by its inflation rate targeting. This development has complicated communication and democratic accountability, especially via the critical and legitimating role of the European Parliament. One potential way of addressing these problems is to re-interpret the mandate of the ECB. This revision requires two linked measures to be taken. There needs to be a more appropriate definition of the ECB Treaty objective of ‘price stability’. This term should now be defined as a ‘constant price path through time’. Second, achievement of this Treaty goal may then be best secured by a new, single mandate targeting Nominal Gross Domestic Product (NGDP). When the ECB was founded, its mission in launching a sound currency was to control retail price inflation, which in fact had already been reduced through structural changes in the global economy. In the last decade the objective has been to avoid price deflation and, where feasible, to encourage demand. NGDP allows demand to increase without the encumbrance of unrealistic and unachievable inflation targets.
More broadly, the question of the democratic accountability of the ECB should be addressed through institutional and policy reform within the EU and the EZ. In both these areas GPI has, in this report and in its previous Federal Central Banks,[2] suggested substantive reforms which will improve the ECB’s communications with citizens.
The espousal of the GPI’s radical, but feasible, new approach for the ECB, should permit four positive changes to be made. First, the simplification of the operation on monetary policy by the ECB, with perhaps a reduction in policy instruments. Second, the potential incorporation of ‘green’ policy measures. Third, a greater awareness of the need to balance the potential impact of central monetary policy actions with compensatory fiscal policy actions. Finally, a re-assessment of its communication channels as the ECB seeks to ensure the economic welfare of European citizens and to communicate its policy actions to its various audiences. The ECB in its enlargement of powers and technical policies has encountered fierce criticisms from different interests and geographical regions. The ECB needs to secure far greater democratic accountability in order to respond to those criticisms, primarily through the ECB monetary dialogue with the European Parliament.
Notes
Viara Bojkova, Michael Lloyd, Sam Whimster ‘The ECB’s Mandate: Perspectives on General Economic Policies’, Global Policy Institute, September 2020. Available shortly at www.gpilondon.
[2] Andrew Black, Viara, Bojkova, Michael Lloyd and Sam Whimster Federal Central Banks:A Comparison of the US Federal Reserve and the European Central Bank, Forumpress, 2018.