A critic to the excessive conservativeness of the monetary policy of the European Central Bank.

A critic to the excessive conservativeness of the monetary policy of the European Central Bank.

di Forte Ivan

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By creating a European Central Bank which is conform to the “German model” (adopted by the “Bundesbank”), it was almost unavoidable the building up of an institution characterized by a strong mandate[1] for price stability[2], but scarcely responsible for the employment fluctuations and stabilizing output.
Therefore, the conservative approach of this policy was voluntarily created in order to eliminate the inflation bias that on the contrary is present in some active countries[3].
Not surprisingly, the ECB’s definition of price stability makes clear that the focus of its monetary policy is on the euro area as a whole. This reflects its euro area-wide mandate. Therefore, price stability is assessed on the basis of price developments in the euro zone economy. 
Consequently, the ECB makes a lot of efforts[4] in order to pilot a European economy characterized by different situations in each Country (as the graph below clearly shows) that negatively influence the European monetary policy[5].
Accordingly, it is almost unavoidable that the ECB is criticized for its incapability to apply interest rates suitable in each country and for leaving them unchanged in spite of a sharp rise in the value of euro, especially against the American dollar.
With reference to this, the conservatism applied by the ECB last July in exercising its monetary policy powers has been hardly criticized by a lot of UE Member States.
In fact, given the E-12 economic situation characterized by a GDP growth by 1,3% , the ECB was supposed to cut the interest changes trying to help kick-start the euro-zone’s sluggish economy. Surprisingly, last July, interest rates were left unchanged at 2% for the 25th month[7]the ECB Governing Council remains reluctant to accept that the bank plays a role in encouraging growth in the slack euro zone, showing again that .
As a consequence, the bank’s inflation target —2% or lower— is still the only relevant of interest-rate policy[8].
For that reason, cutting rates is considered dangerous because it could create inflationary expectations and hence push up long-term interest rates.
Thus, in spite of the permanent shock in unemployment we are living in, this conservative approach adopted again by the ECB has left the euro area with less room to grow whereas in the US for example a liberal approach adopted by the Federal Reserve drive to different results.
Consequently, in the international context we have a volitive Federal reserve able to anticipate every development in the market by moving rates up or down as circumstances change and by not attaching a great importance to price stability and a rigid ECB that with its conservative policy put increasingly in danger its credibility by not reacting to movement in the business cycle[9].
In fact, the endless rise of euro against the American dollar create tough consequences for the European exportations given that a strong euro makes our products less competitive, discouraging purchases made by foreigners and provoking a serious economic stagnation . 
As a result, the ECB for not increasing the euro-delusion in the whole EU 12 area, should give up its conservative monetary policy by cutting interest rates in order to contrast the excessive value of the common currency and to reduce the unemployment.
As we know, the pursuit of price stability is an instrument created in order to achieve a target (maximum sustainable growth), but is not goal in itself.
Undoubtedly, the ECB’s priority is price stability; notwithstanding it is also legally charged with supporting growth.
Consequently, last July it should have acted flexibly by cutting interest rates in order to offset the impact of the rising euro and to please the E12 countries incapable at this stage to cope with their economic problems.
Alternatively, today it should show its willingness to ease monetary policy in order to cushion the impact of structural reform and fiscal discipline.
To summarize, the economic situation in Europe is sluggish because of the high rate of unemployment and of the rise of euro whereas the flexible Asian economies are invading our markets making close down a great number of European firms.
Because of that, given that the ECB is not anymore in its embryonic phase, considering moreover its independency and the huge credibility gained in the international economic framework, it is now necessary to make better use of its powers taking increasingly into account the E12 actual welfare.
Accordingly, there are no more alibis for reducing the economic growth with the excuse of controlling the inflation rate that anyway difficultly will raise because of the drastic reduction of the consumption provoked by a scarce purchasing power. 
In brief, time has come for the ECB to grow up adapting less conservatively its monetary policy to the actual exigencies of the E12 market.
ANGELONI Ignazio, ISSING Otmar, GASPAR Vitor, TRISTANI Oreste: Monetary policy in the Euro Area, Cambridge, 2002;
FRIEDMAN Milton, “A program for European stability”, Fordham Univerity Press, 1959;
FRIEDMAN Milton, “Inflation causes and consequences”, Asia Publishing House, 1963;
“Can this union be saved?”; Available at: http://www.economist.com/agenda/displaystory.cfm?story_id=4051116
“Haughty indifference, or masterly inactivity?”; Available at:
“Making a point”; Available at:

”The European Central Bank: Less bashing, please”; Available at:
“The euro and its troubles”; avilable at:
SIMS Thomas, “L’éclatement de la zone euro n’est plus un tabou” ; in Courrier international – n. 762 – du 9 mai 2005, p. 63  ; or available at:
PFAFF William, “Révolte européenne contre l’orthodoxie économique” ; in Courrier international – n° 669 – 28 août 2003, p. 9.; or available at:

[1]ANGELONI Ignazio, ISSING Otmar, GASPAR Vitor, TRISTANI Oreste: Monetary policy in the Euro Area, Cambridge 2002 p. 65: “The article 105 of the Treaty clearly specifics that the primary objective of the ECB is to maintain price stability”.
[2] The ECB’s Governing Council has defined price stability on 13 October 1998 as "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term". The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term
[3] In those countries, an “active policy” aiming to stabilize the unemployment rate, will produce an inflation bias unable to produce any benefit in the long-term unemployment, whereas with its conservative approach the ECB is responsible for price stability but it can’t cope with unemployment because it is a structural phenomenon incapable to be alleviated by monetary policies. Consequently it is a national political responsibility to cope with it by structural reforms able to reduce taxes on labour and to create flexibility in the labour market.
[4] In fact, in Europe there are few mechanisms in order to bring the euro area’s widely divergent business cycles into sync. The ECB has been trying to chart a middle course between slow- and fast-growing countries while establishing its credibility as an inflation-fighter. The result has been a monetary policy that is too “hot” for some, too “cold” for others, and “just right” for almost no one.
[6] Can this union be saved?”; Available at: http://www.economist.com/agenda/displaystory.cfm?story_id=4051116
[7] In fact, the last modification to the interest rates was done in June 2003.
[8] As the President of ECB Jean-Paul Trichet confirmed after the Governing Council it was impossible to modify the interest rates in the directions the Member State were longer to because of the risk of a higher inflation due to the more expensive prises of fuel.
[9] For instance, the flexible monetary policy adopted by the Federal Reserve through the absence of rigid restrictions concerning the federal budget has permitted to the US ‘economy to grow impressively despite the economic crisis in 2001.  
[10] “Less bashing, please”; available at http://www.economist.com/displaystory.cfm?story_id=4174190
In this graph, is possible to remark the differences concerning the intervention made by the flexible US Fed and the ECB in the last six years.

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