The ECB Should Stop Saying Its Hands Are Tied
As Europe's economy began to turn for the worse in November 2010, Jürgen Stark, an austerity-minded economist then on the European Central Bank's executive board, said, "The mandate of the ECB to deliver price stability is clear and will remain unchanged. It is anchored in the Maastricht Treaty. I am glad that we have this single mandate instead of a dual mandate or even more objectives."
Stark was wrong -- and not just in calling for the ECB to stop its emergency monetary measures. The ECB doesn't have a single mandate. That term appears in none of the treaties establishing the central bank. The treaties speak instead of its "primary objective" of price stability.
A single mandate would mean the ECB had no other goal, which is what Stark was proposing. Yet the very notion of a "primary objective" implies other, admittedly subsidiary, objectives -- and the ECB's founding documents say what these are. Without prejudice to the objective of price stability, the European System of Central Banks "shall support the general economic policies in the Union," according to Europe's rulebook. "These include inter alia 'full employment' and 'balanced economic growth.'"
The ECB explains its understanding of this mandate on its website. "Given that monetary policy can affect real activity in the shorter term," it writes, "the ECB typically should avoid generating excessive fluctuations in output and employment if this is in line with the pursuit of its primary objective."
Article 66 also empowers the ECB to act if movements of capital "cause, or threaten to cause, serious difficulties for the operation of economic and monetary union."
Stark is not alone in consistently misinterpreting the mandate -- or at least in interpreting it as narrowly as possible, rather than as broadly as conditions demand. The ECB is failing to act even as euro-area unemployment rises above 12 percent, inflation is below target and falling, economic output collapses, and peripheral members consider an exit of the common currency. Any of the lines quoted above would give the ECB a rationale for easing monetary policy to restore macroeconomic stability.
So far, the ECB has recognized these responsibilities only in a limited context: the threats to the sovereign debts of euro nations and the "financial fragmentation" of the euro-area interbank lending market. That was the issue that led Mario Draghi, the president of the ECB, to make his famous pledge. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," Draghi said in 2012. "And believe me, it will be enough." As yet this applies only to the banks. The ECB hasn't recognized any monetary commitment to halt a deepening double-dip recession.
Yet there are small signs that this could be beginning, just beginning, to change. "It is of particular importance at this juncture to address the current high long-term and youth unemployment," Draghi said at a press conference last week. "Unemployment is a tragedy and youth unemployment is an even bigger tragedy." For now, it's just words, but it suggests attitudes may be shifting.
Some argue that there's little the ECB could do even if it wanted to, because -- mandate aside -- Fed-like quantitative easing isn't possible under ECB rules. Another former member of the ECB's executive board, Jose Manuel Gonzalez-Paramo, disagrees. “If the screens were to tell you we were approaching deflation, the ECB could expand its balance sheet,” he told Bloomberg. “This is hypothetical, but there’s nothing that prevents the ECB from executing some QE-type” program.
The ECB should stop saying its hands are tied.
(Evan Soltas is a contributor to the Ticker. Follow him on Twitter.)