Too Many Policies At The Ecb

The European Central Bank has one of the toughest jobs in international finance. It must set a single monetary policy for 11 countries whose economies move at different speeds and have different fiscal, tax, and labor policies. If the U.S. economy operated under these conditions, even the legendary Alan Greenspan, chairman of the U.S. Federal Reserve Bank, would find it very hard. So it's hardly surprising that the fledgling central bank, not yet two years old, is having difficulty establishing its credibility in the markets.

Much of the ECB's problems can be traced to the fact that it is mandated to consider both money-supply growth and a broad-based analysis of inflationary risks when setting interest rates. Right now, the two indicators point in different directions and the markets are confused about which way the ECB is actually leaning.

The ECB's problems are also compounded by President Wim Duisenberg's consensual management style, which allows all 17 members of the bank's governing council to speak in public. Unfortunately, they often contradict each other, sending the currency markets and the sickly euro into paroxysms. If the ECB wants to win the respect of the markets, governing council members have to start singing with the same voice in public. And the bank needs to explain better how its twin pillar system works by clarifying just how much weight it gives to each of the indicators when it makes its decisions.

So far, the ECB has had it easy. It was born just as European economic growth was taking off. What happens when it begins to slow down?

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