He has been watching over the common currency for a quarter of a century. The European Central Bank (ECB) took its first steps on June 1, 1998. It was born following the model of the Bundesbank. With a clear mandate: to control inflation, so that it is stable at around 2%. Has it fulfilled its function?
Apparently, yes. The euro is a success, it is used by 350 million people in twenty countries and is the second largest currency on the planet. Also, in the last 25 years the inflation rate of the Eurozone has been at 2.05%. But this figure can only be reached with the rise experienced from mid-2021. If you look at it in perspective, for many years inflation in the euro zone was too low. And now, with 7% in April, it is too high.
Throughout its life the ECB experienced several existential crises. When Dutchman Wim Duisenberg initially took command, the eurozone was preparing for enlargement and the economic cycle, with the arrival of the internet, was expansive. There were 11 members of the euro, almost half as many as now. But then came 9/11, the dotcom bubble and the financial crisis of 2008. Jean-Claude Trichet, who succeeded him in office, raised rates ahead of a recession and Europe was caught in the crisis
In the beginning it seemed that only inflation mattered in the ECB’s mind. But this dogma has been diluted over the years. With tensions between hawks and doves, today the ECB (although it denies it) is also taking a look at financial stability and not just price growth. This was evident when in 2019 the current president, Christine Lagarde, said that the risk premium was not part of the bank’s mandate. He had to backtrack the next day, to avoid a stock market collapse. Previously, it was Mario Draghi who had to resort in 2012 to his famous “whatever it takes” (whatever it takes) and expansive policies to get out of the sovereign debt crisis.
In a word, today the ECB has assumed a more relevant role than the one for which it was created. Proof of this is that with the attacks on the Twin Towers (2001) or with covid (2020) we saw concerted actions by the three largest central banks on the planet, which in no way intended to control inflation, but to avoid the collapse of the real economy.
Without reaching the levels of the Federal Reserve, which is also dependent on economic growth (and which closely monitors both the unemployment rate and inflation), today the ECB extends its domain: it buys state debt, makes calls on policies tax authorities, oversees banks and, as a novelty, steps into technological advances such as digital currencies.
“Unfortunately, the ECB has seen its independence deteriorate”, comments a Barcelona investor. “The institution has acted late in recognizing the problem of inflation and does not transmit the solidity it should transmit”.
Indeed, during these 25 years, the ECB has only managed to keep inflation at 2% for 16 months out of a total of 300. Even if we add some fluctuation in which the inflation rate moved between 1.9% and 2.1%, at the end of the day it would reach 51 months. In other words, in 83% of the time since its creation, the bank has not achieved its goal. None of the four presidents who have passed through the ECB has fulfilled the bank’s mandate.
They say central bankers have no heart. But its 4,200 employees (ten times more than at the beginning) do have it. A few days ago they were negotiating a 4% salary increase, even with the threat of a strike, also worried that the ECB would not be able to put a stop to the price escalation.
