European Central Bank Expands Mandate as It Struggles to Keep Zone Intact
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Version 0 of 1. SINTRA, Portugal — Only a few years ago, the European Central Bank was regarded as relatively powerless when compared with its counterpart in the United States. But as it has struggled to hold the eurozone together, the bank has become more like the Federal Reserve. And that was on view this weekend as top central bankers and economists gathered here to discuss economic issues that extended beyond the bank’s mandate of containing inflation. The title of the two-day gathering at a coastal golf resort here, “Inflation and Unemployment in Europe,” offered a clue. With the eurozone’s unemployment rate at 11.3 percent, the subject signaled concern among members of the European Central Bank’s Governing Council about the persistence of a high rate of joblessness. The European Central Bank’s charter does not prohibit it from taking unemployment and other factors into consideration when setting interest rates. But unlike the Fed, which has a broad mandate to fight inflation, contain unemployment and ensure moderate borrowing costs, the European Central Bank is required to make price stability its top priority, incorporating other concerns only if they do not interfere with the prime directive. Mario Draghi, the president of the central bank, has sidestepped that restraint by arguing that the bank could not guarantee price stability unless it considered joblessness and other issues, like the state of the banking system. At the conference, Catherine L. Mann, chief economist of the Organization for Economic Cooperation and Development, and other economists said the European Central Bank had to assume greater responsibilities because eurozone economies had not adjusted fast enough to the crisis that began in 2008. “The single mandate is dead,” Ms. Mann said. The de facto expansion of the European Central Bank’s mandate has occurred without any enabling legislation or formal endorsement from elected leaders. Some of the economic specialists in Sintra warned that the central bank risked a backlash at a time of widespread public disenchantment with the European Union. Charles Wyplosz, a professor at the Graduate Institute Geneva, reminded conference participants of “how unpopular the European construction has become outside this room.” He criticized a proposal by Mr. Draghi that would put more pressure on European political leaders to overhaul their economies. “If it’s top down, if it’s forced against public opinion, there’s a backlash,” Mr. Wyplosz said. Mr. Draghi disputed that the European Central Bank had expanded its mandate. But he agreed that the bank had evolved substantially. “The crisis changed forever the E.C.B.,” Mr. Draghi said at the conference, which was held at a former monastery converted into a luxury golf resort. “The mandate is always the same, namely price stability in the euro area,” he said. “But the instruments had to change.” All of the major central banks expanded their monetary policy arsenals after the financial crisis. In March, the European Central Bank followed a precedent set by the Fed and began buying tens of billions of euros worth of government bonds, a form of money printing intended to raise inflation closer to the official target of nearly 2 percent and stimulate the eurozone economy. Michael C. Burda, a professor at the School of Business and Economics at Humboldt University in Berlin, said that the bond buying could become a permanent feature of eurozone monetary policy, as it is with Fed policy. Previously, the main way that the European Central Bank steered interest rates was by lending to banks. The rate it offered banks became a benchmark. But when banks had no appetite to borrow, as has been the case in the eurozone in recent years, the central bank had problems influencing market interest rates. The official program featured only passing reference to Greece, despite its increasingly acute financial problems. The expansion of the European Central Bank’s powers began under Mr. Draghi’s predecessor, Jean-Claude Trichet, who was also vocal in advising governments. But in monetary policy, Mr. Trichet stuck close to the playbook inherited from the German central bank, the Bundesbank, with its fixation on price stability. “We only have one needle in our compass,” Mr. Trichet often said. The Bank of Japan, the Japanese central bank, has also become more aggressive after two decades of falling prices and little growth. It has begun a bond buying program that is intended to reinforce a government spending program to stimulate the economy. Haruhiko Kuroda, the governor of the Bank of Japan, said here that the bond buying, known as quantitative easing, was not a quid pro quo agreement with the government but simply “a division of labor.” The statement hinted at the discomfort that central bankers, who prize their independence from political influence, feel about interacting too closely with governments. The actions of the European Central Bank have been crucial in holding the eurozone together, especially when political leaders could not agree on actions. Mr. Draghi drew criticism at the conference, though, when he called for tougher measures to ensure that political leaders do more to improve the performance of their economies. While he did not fault any individual eurozone countries, he said that leaders needed to be bolder in dismantling regulations that prevented entrepreneurs from starting businesses and made it difficult to dismiss unwanted workers. Such action should be a condition of eurozone membership, he said. Top officials of the Fed are more restrained in advising American political leaders. Stanley Fischer, vice chairman of the Fed, said at the conference that if central bankers told elected officials what to do, the elected officials would be emboldened to meddle in monetary policy. “What do we say about things that aren’t under our control but that matter from the viewpoint of the economy?” Mr. Fischer said during a panel discussion. “The answer is, you can talk about it from time to time, but you can’t make this your main talking point.” But unlike the United States, the eurozone has no strong central government and few programs that automatically transfer money to economically distressed countries like Greece. No Europewide unemployment insurance exists, for example. The European Commission has limited power to coerce national governments to make changes economists say are necessary, but that are unpopular with voters or powerful interest groups. Mr. Draghi said the European Central Bank had trouble doing its job because eurozone governments had not done enough to promote growth. Therefore he has a duty to speak up, he said. “Central bank governors,” he said, “should be quite clear about policies, or lack of policies, that hamper their mandates, that make their mandates more difficult or impossible.” |