What changed between the draft committee report and the plenary report

In uncertain times, it is appropriate to go back to basics on the goal of monetary policy. The central bank needs to make sure that in good times the amount of money and credit grows at a rate sufficient to maintain broad stability of the value of money and in bad times the amount of money grows at a rate sufficient to provide the liquidity for unpredictable swings in demand. In 1998, the ECB was set up to conduct monetary policy in the EU with the primary objective of maintaining price stability and a secondary and subordinate objective of supporting the general economic policies in the EU.

In certain parts of the world, the political independence of the central bank has come under scrutiny. Therefore, the report starts off with a section on governance and the clear recognition that the ECB has and retains statutory independence. The ECB’s political independence is crucial for stable monetary policy. Otherwise, the incentive would be great to use the money printing press to get out of the conundrum of tight fiscal positions and challenges such as defence spending, a recipe for instability. The ECB is, however, accountable to the European Parliament. The Parliament holds continuous discussions, as the EU institution responsible, with the representatives of the ECB. These arrangements should be enhanced where useful. Furthermore, accountability has no heft without transparency. Monetary policy is too often likened to alchemy with model-based assumptions and programs that merely take care of effective transmission of monetary policy. The report invites the ECB to look into ways that could enhance transparency in its policymaking.

The primary objective of the ECB, and the subject of the next section of the report, is price stability. The price stability mandate was quickly interpreted as an inflation stability mandate, whereas stability of the price level could be a more natural interpretation. Inflation stability was linked with a reference value of ‘below 2%’. In 2003, this objective was altered towards an inflation rate ‘below, but close to’ 2% and rephrased into a symmetric target around 2% in 2021. This evolution towards a symmetric target is quite fundamental. Even if prices stayed stable, monetary authorities would still aim for slight inflation, once seen as “below 2%.” Between 2014–2019, the economy grew steadily and inflation stayed low. Rather than easing interventions and raising rates, the ECB let its balance sheet more than double.

Another risk lies in putting too much weight onto a precise numerical target. The language of anchored and deanchored inflation expectations may prove more useful, such that price stability is looked at qualitatively as a state in which expected changes in the general price level do not significantly alter business or household decisions. The years after the Covid Pandemic led to a surge in inflation and the ECB’s response was too slow. Its forward guidance schemes said that the interest rate should remain low.

The underlying concern behind the shift in the target is the risk of deflation. A 2% target allows for a margin before deflationary numbers are reached. Yet, protracted deflationary periods have been rare in developed economies and deflation can also arise as a benign consequence of technological progress. In this context, preventing deflationary spirals would benefit most from a strong lender of last resort to solvent institutions, against good collateral and at penalty rates, rather than from a target that deliberately leaves room for manoeuvre. Encouraging inflation, on the other hand, can increase risk-taking and contribute to the formation of bubbles, which may ultimately bring about the very deflation such policies aim to avoid.

The political independence of the ECB is linked to the popular consensus about price stability. In other cases, such as fiscal policy and how to tackle climate change, a political and democratic debate is essential. The report discusses secondary objectives next. Since the sovereign debt crisis in the EU of the early 2010s, the ECB has gradually become more involved in sovereign debt markets. The ECB’s capacities to purchase sovereign bonds have been widening over the different purchasing programmes. Nowadays, the ECB gains a reputation as a fiscal backstop. However, its large role in the sovereign debt market may turn up as an important consideration in the ECB’s policy responses and complicate its role to preserve price stability. The ECB has also ventured into green central banking, as climate change and nature variation are deemed a threat to price stability. Even though this could be the case in the longer term, numerous other factors can thus be found to affect price stability. A war would evidently have an impact on prices, but that does not mean the ECB should have defence capabilities.

The report ends with several other aspects. The topic of the digital euro is mentioned, as it is currently under discussion among the co-legislators. Moreover, it is recognized that the international role of the euro can be accommodated by the ECB, but the euro’s prominence will ultimately depend on fundamentals, such as the strength of the euro economy and the rule of law. The ECB also has an important role to play in the Single Supervisory mechanism.

To conclude, a return to the basic principles of conducting monetary policy is due. Monetary policy can foremost prevent money itself from being another major source of economic disturbance.