{"id":3548,"date":"2019-07-12T05:11:28","date_gmt":"2019-07-12T05:11:28","guid":{"rendered":"http:\/\/euromenaenergy.com\/?p=3548"},"modified":"2019-07-12T05:11:28","modified_gmt":"2019-07-12T05:11:28","slug":"the-ecb-needs-to-explain-itself","status":"publish","type":"post","link":"https:\/\/emimer.com\/?p=3548","title":{"rendered":"The ECB Needs to Explain Itself"},"content":{"rendered":"<div class=\"article__abs u-mt-se\" dir=\"ltr\">Ambiguity is hampering effective policymaking by the European Central Bank and leaving market participants wondering what to expect. A review of the ECB&#8217;s policy framework would help to eliminate such ambiguity \u2013 and place the Bank on much sounder footing for a new era of leadership.<\/div>\n<div class=\"article__body article__body--commentary english\" dir=\"ltr\" data-page-area=\"article-body\">\n<p data-line-id=\"bdfe0c5348d340acb10a7587a5c69e62\">ZURICH \u2013 Finland\u2019s central bank governor, Olli Rehn, has reiterated his\u00a0call\u00a0for the European Central Bank to conduct a long-overdue review of its policy framework. The upcoming change of leadership at the institution \u2013 with\u00a0Christine Lagarde, the International Monetary Fund\u2019s managing director since 2011, likely to succeed\u00a0Mario Draghi\u00a0as president \u2013 offers an important opportunity to heed that call.<\/p>\n<p data-line-id=\"162ffc2ea7fc41feacca00284903b2e9\">When the ECB was established 20 years ago, central banks were generally not too clear about the details of their policy frameworks. At that time, some ambiguity may have been helpful, because of the flexibility it offered when the ECB started operating. Furthermore, it allowed central bankers with different experiences and perspectives to agree on a framework, even though they may not have agreed on its precise details.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"ccaf17411a334ac5a3402f9913204d96\">But the world has changed considerably since then, and the public is now demanding far more clarity. How can the ECB offer that, 16 years after the last review of its monetary-policy framework?<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"ae0c17d6320d4cfb9afa5ca07cc4c5ab\">Since that review, conducted in 2003, the global financial crisis, and the ensuing European debt crisis, prompted the ECB to adopt a plethora of new policy instruments. These crisis measures \u2013 which have been deeply unpopular, particularly in Germany \u2013 can be justified only to the extent that they have been effective, and this must be evaluated. Moreover, as Rehn, who sits on the ECB\u2019s governing council, has noted, long-run structural trends \u2013 such as population aging, lower long-term interest rates, and climate change \u2013 must be considered.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"4f236dbcb2b547fd9afc081ca1f1a3b5\">The effectiveness of ECB policy requires the members of the governing council to be singing from the same song sheet. They need a shared understanding of Europe\u2019s long-term goals and the strengths and weaknesses of various policy instruments. And, in order to strengthen accountability and support smart decision-making, they need to be able to spell out the details of their monetary-policy strategies in ways that the public can understand.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"691badd2e12d469485dc667373291a4f\">As it stands, such clarity is at times hard to find, even when it comes to some of the most fundamental elements of the ECB\u2019s policy strategy. Price stability \u2013 the ECB\u2019s primary objective \u2013 is currently expressed as \u201cinflation below, but close to, 2%.\u201d Does 1% inflation meet that condition, or is it too low, demanding more monetary-policy accommodation? Different members of the ECB\u2019s governing council may well have different answers to this question, and thus support different policies.<\/p>\n<div class=\"small-12 medium-10 medium-offset-1 large-8 large-offset-2 xlarge-6 xlarge-offset-3 cell u-mt-se\">\n<div class=\"article__body article__body--commentary english\" dir=\"ltr\" data-page-area=\"article-body\">\n<p data-line-id=\"8ecc850c68e9491b8867021070b1275b\">The same goes for the questions of whether the ECB\u2019s inflation target is symmetric \u2013 with the authorities intervening as vigorously when inflation is too low as they do when inflation is too high \u2013 and whether inflation should be measured over time or at a given moment. If, over some period, the inflation rate ranges from 0% to 4%, but averages to \u201cbelow, but close to, 2%,\u201d has the objective been achieved?<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"bc7600919fe54ef0b71db673efb44c1c\">The answer has major policy implications. If inflation is measured over time, the ECB could accept, or perhaps even aim for, a somewhat higher inflation rate in the medium term, to compensate for the excessively low inflation of recent years. If the public came to believe that a period of above-target inflation was likely, the expected real interest rate would fall, giving a jolt to the economy.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"d97e0a54293741e7aca6f421fddc6e21\">Of course, Draghi has established in\u00a0speeches\u00a0and press conferences that, in his view, the inflation target is symmetric; 1% inflation is too low; and the inflation rate should be measured over the \u201cmedium term.\u201d But it is not clear whether this view is broadly shared within the ECB\u2019s governing council.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"f822b8711e214470887feac2fb4d255e\">Inflation targeting is hardly the only area where ambiguity is hampering effective policymaking and leaving market participants wondering what to expect. The ECB\u2019s outright monetary transactions (OMT) scheme \u2013 whereby the ECB promises to purchase bonds issued by eurozone member states on secondary sovereign-bond markets \u2013 is also generating significant uncertainty.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"2aa4ac12dbb04d588698991178cecba1\">OMT, Draghi\u2019s chosen tool for fulfilling his 2012\u00a0vow\u00a0to do \u201cwhatever it takes to preserve the euro,\u201d was controversial from the moment it was announced, with Bundesbank President Jens Weidmann \u2013 one of Lagarde\u2019s main rivals for the ECB presidency \u2013 arguing fiercely against it in public. But that was seven years ago, and OMT has never actually been used. Is the governing council still committed to it? Or have the events \u2013 and council membership changes \u2013 of the last few years rendered that commitment obsolete?<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"a6b8e040df814cb099b3705891905941\">With public debt in Greece and Italy still far too high, the eurozone still at risk of slipping into a recession that would significantly worsen both countries\u2019 fiscal positions, and Italian politics as volatile as ever, it would pay to know. A review of the kind Rehn demands would provide the needed answers \u2013 and put the ECB on much sounder footing for a new era of leadership.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<\/div>\n<\/div>\n<section class=\"show-for-xlarge article__sidebar u-mt\">\n<article class=\"list__nritem\">\n<header class=\"listing__header\">\n<p class=\"listing__excerpt\"><a class=\"track-event avatar-wrapper\" title=\"Profile of Stefan Gerlach\" href=\"https:\/\/www.project-syndicate.org\/columnist\/stefan-gerlach\" data-entity-type=\"member\" data-entity-id=\"5730638b2bd5d20bd02ec664\" data-language=\"english\" data-event-action=\"click\" data-entity-link-name=\"stefan-gerlach\" data-href-original=\"\/columnist\/stefan-gerlach\"><img decoding=\"async\" class=\"avatar\" src=\"https:\/\/webapi.project-syndicate.org\/library\/efe0efa9a624c133bd9ec49b51b3fe2d.square-small.1.png\" alt=\"Stefan Gerlach\" \/><\/a><\/p>\n<p class=\"listing__excerpt\">STEFAN GERLACH<\/p>\n<\/header>\n<\/article>\n<\/section>\n<aside class=\"small-12 medium-10 medium-offset-1 large-8 large-offset-2 xlarge-6 xlarge-offset-3 cell u-mt interaction--hideable printable\" data-page-area=\"article-bottom\">\n<div class=\"u-mb\" data-id=\"stefan-gerlach\">\n<div class=\"nmd-item\">\n<div class=\"name-wrapper\">\n<div class=\"meta meta--block\">Writing for PS since<strong>\u00a02016\u00a0<\/strong> Stefan Gerlach is Chief Economist at EFG Bank in Zurich and a former deputy governor of the Central Bank of Ireland. He is also a former Executive Director and Chief Economist of the Hong Kong Monetary Authority and Secretary to the Committee on the Global Financial System at the BIS.<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/aside>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Ambiguity is hampering effective policymaking by the European Central Bank and leaving market participants wondering what to expect. A review of the ECB&#8217;s policy framework would help to eliminate such ambiguity \u2013&#8230;<\/p>\n","protected":false},"author":1,"featured_media":3554,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[17],"tags":[46,48,57,68,76,77,82,87,90,96,99,107,109,111,113,137,139,146,148,160,174,183,184,201,202,209,222,230,232,233,244,246,249,256,262,263,267,277,279,288],"class_list":["post-3548","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-aramco","tag-athens","tag-baroudi","tag-carbon","tag-climate","tag-climate-change","tag-co2","tag-decarbonising","tag-democracy","tag-doha","tag-eastmed","tag-embargo","tag-emissions","tag-energy","tag-energy-peace","tag-gas","tag-gazprom","tag-greece","tag-greenenergy","tag-international-maritime-disputes","tag-lebanon","tag-maritime-boundaries-east-mediterranean","tag-maritime-disputes","tag-offshore","tag-oil","tag-opec","tag-pollution","tag-poverty-alleviation","tag-putin","tag-qatar","tag-rosneft","tag-roudi","tag-russia","tag-saudi","tag-solar","tag-solar-power","tag-straddling-hydrocarbons-reserves","tag-total","tag-trump","tag-usa"],"_links":{"self":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/3548","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3548"}],"version-history":[{"count":0,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/3548\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/media\/3554"}],"wp:attachment":[{"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3548"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3548"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3548"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}