Simon-Wren Lewis (here and on these pages) is as disappointed by the ECB’s lack of action as I am. He makes a number of important additional points, such as the fact that the ECB’s perceived upside risks to price stability (administered prices, VAT and oil) are things that most sensible macroeconomists do not believe that a central bank should react to at all. He is also right to argue that even if the ECB is only concerned with prices, there is a strong case for action.
It is worth recalling, however, that this is not the mandate that successive European Treaties have given the ECB. The Treaty does not say that as long as inflation is on target the central bank can do what it likes or refrain from action as it sees fit. On the contrary, the Treaty (Article 127 of the Treaty on the Functioning of the EU) is very explicit that provided price stability is assured (defined by the ECB as medium-run consumer-price inflation just below 2% p.a.) the central bank is obliged to contribute to the general economic policies of the European Union in order to serve the general objectives of the EU (as set out in Article 3 of the Treaty). These include “balanced economic growth”, “full employment” and “economic, social and territorial cohesion, and solidarity among Member States”.
There is thus a very clear obligation on – not option for – the Bank to purse these goals, provided price stability is assured. Price stability is currently assured (if anything there is a risk of deflation) and so the ECB must, under the Treaty, do all it can to achieve these goals for as long as the situation of there being no threat to price stability prevails. There is thus a clear current requirement to pursue as expansionary monetary policies as possible. It is not sufficient to say that the stance is “accommodative”.
Since the Lisbon Treaty, it is true, “price stability” is also mentioned in Article 3. This is regrettable, not because price stability is not important, but because it is used by the ECB as a cover to insist that it has “only one needle in its compass” (i.e. price stability), as former President Trichet liked to say: you see, price stability is the primary goal of the central bank, but also its secondary goal, because it forms part of Article 3. Of course this argumentation makes no sense: if price stability is indeed assured then the primary goal is achieved, the secondary goals kick in and, of these, price stability need no longer be considered because it has already been taken care of under the primary mandate.
An irony here is that the ECB has a habit of taking very specific views about the sort of supply-side policies it thinks that countries should implement, for example how its labour market and collective bargaining institutions should be designed. It does not hesitate to seek to impose these views. (The ECB letter to the Berlusconi government in late 2011 is a case in point.) This involvement in supply-side matters is usually justified with a reference to the need to prevent inflation. It is highly contradictory to reject the implementation of expansionary monetary policies (which are very obviously part of the remit of the central bank) while getting involved in national supply-side issues, which are clearly not, all with reference to one and the same mandate. This is only possible because of the one-sided way that the ECB is allowed by politicians and the media to interpret that mandate.
As I intimated in my post, that mandate could conceivably be re-interpreted as seems to be happening in Japan. As is well known, the Federal Reserve follows a more evenly balanced approach. It has often been suggested that the stability of the financial system be explicitly included in the ECB mandate. Be that as it may, even the current mandate, properly understood, does not offer a fig-leaf behind which the ECB can hide its inaction.