New strategy of the ECB: The underestimated goal of monetary stability

The European Central Bank has had a mandate that has not changed since it was founded, with the primary goal of securing price stability. In addition, provided that this does not conflict with its primary objective, it should support the general economic policy of the European Union in order to achieve the objectives set out in the Treaty on EU. Among these objectives, the Union includes a highly competitive social market economy, but also a high level of environmental protection, the promotion of scientific and technical progress and the fight against social exclusion and discrimination.

The ECB, like other central banks, defines the fundamentals of its monetary policy within the framework of a strategy that has now been revised again after 18 years and changed in parts.

With these changes, some of which are highly controversial internally, the ECB risks becoming a political actor who oversteps the narrow limits that are set for an institution that is independent of government policies for good reason.

The rationale for the independence of the central bank from elected politicians has always and exclusively been based on the experience that elected politicians have often been poor administrators of monetary stability.

But stable money is a basic requirement for a politically and economically stable community.

A dissent in the leadership

But that also means: An independent central bank must not presume to conduct politics in fields that belong to the territory of elected politicians and for which elected politicians are responsible. According to a traditional understanding that is mainly at home in Germany, securing monetary stability as the primary objective of monetary policy therefore provided the best possible support for general economic policy, which is established as a secondary objective. But that is no longer enough for many central banks today. In the United States, in addition to the distribution of income and wealth, discrimination has also moved into the focus of monetary policy.

In the new strategy of the ECB, as requested by President Christine Lagarde, the fight against climate change is of particular importance. It is one thing, as the ECB, to examine precisely those effects of climate change that are relevant for monetary policy and the stability of the financial system. There are good reasons for this. However, it is a different matter if a central bank sees itself as an actor who takes the (possible) inadequacies of the climate policy of elected governments as an opportunity to, for example, pursue climate policy by selecting the corporate bonds it has bought. How far the ECB intends to go in order to actively support goals other than securing monetary stability in the future remains vague in the description of its new strategy. This expresses a dissent in their leadership,who will shape the debates of the coming years. The risk that the ECB defines its mandate too generously cannot be denied.

The strategic adjustments at the core of monetary policy, on the other hand, are not significant. With an inflation target of two percent defined for the medium term, which can be exceeded or fallen short of in the short term, the ECB is following a practice that several dozen other central banks have already adopted. Why does monetary policy not aim for an inflation rate of zero is a frequently asked question. On the one hand, based on a decades-old fear of deflation, central banks estimate a safety margin against falling prices. On the other hand, there is good evidence that the reported inflation rate exaggerates the actual inflation because it does not adequately take into account improvements in the quality of goods and services.

The intention, like other central banks, to include not only rents but also the cost of owner-occupied residential property in the shopping cart, which is used to calculate the inflation rate, deserves great praise. According to simulations, this change in statistics is likely to cause the inflation rate to rise by around 0.2 percentage points in the current environment. That is not much and in any case significantly less than many observers in Germany in particular might expect, but it contributes to the realism.

In the first decades after World War II, fear of high inflation was a constant companion in monetary policy. For around three decades now, inflation has not been a serious issue in the industrialized nations; occasionally there was even serious discussion of the risk of deflation. The absence of high inflation rates for more than a generation has, of course, been a welcome development. But it must not induce monetary politicians to underestimate their primary goal of monetary security in order to cavort in policy fields in which they have no business.