The monetary policy setting in the Eurozone

Résumé du document

The Maastricht Treaty was signed the 7th of February 1992 by the members of the so-called "European Community", which became by then the "European Union". It ended a long road to achieve a monetary union at the European level, and a single currency, the euro. Inspired by federal states such as the United States or Germany, the Treaty established a structure, the European System of Central Banks (ESCB) and especially the European Central Bank (ECB) at its head, which are formally in charge of the conduct of the monetary policy of the Eurozone since January 1999. The ECB is a young institution compared with central banks such as the Federal Reserve (Fed) in the United States. While the latter on the one hand is often characterized by its "flexibility and its capacity to adjust" (Sardoni and Wray, 2006:451), the ECB on the other hand has a reputation of extreme caution and of obsession with low inflation.

What more precisely characterize the monetary policy of the European Union, and how is it decided and executed? In order to answer these questions about monetary policy setting, we will first draw the main features of the structure of monetary policy-making in the ESCB. Then, we will move on to the policy objectives and strategies of the ESCB and of its main institution, the ECB. Finally, we will tackle the issue of evaluating the monetary policy of the European monetary union after more than a decade of existence.

Extraits

[...] Indeed, because there is only one currency, there can only be one monetary policy for the 17 countries of the Eurozone. This has two major implications. First, the ESCB's monetary policy, even if it is the same, cannot have the same impact within the different countries and areas of the Eurozone. Indeed, transmission mechanisms of monetary policy are not uniform within the Eurozone (Clausen and Hayo, 2006; Caporale and Soliman, 2009). For instance, the ESCB decides of a common nominal short-term interest rate for the whole area, but this is not necessarily a common real interest rate, (i.e. [...]

[...] * * * After looking at the institutional framework of monetary policy- making in the Eurozone, we move on here to the content of European monetary policy, its objectives and strategies. The ECB is often said to be inspired by a culture of price stability, a German-style monetary discipline (Baldwin and Wyplosz, 2009). And indeed, the article 105 of the Treaty establishing the European Community states that primary objective of the ESCB shall be to maintain price stability'' within the Eurozone. [...]

[...] Another way of evaluation of monetary policy is to look at its impact on the real economy. Strict low inflation monetary policy was often blamed for the slow growth within the Eurozone and qualified as restrictive”. Some argue that the ESCB's “secondary objectives” such as fighting against unemployment should prevail when deciding the monetary policy of the area. It is true that there is a greater consumption of the effect on the economy of monetary policy in the United States than in Europe (Angeloni, 2003). [...]

[...] One may argue that the ECB has a need for more flexibility in monetary policy-making, compared to the Fed for instance, but that seems difficult when so many opinions have to be taken into account. References Baldwin R., Wyplosz C The economics of European integration. London: McGraw-Hill Higher Education. Lee J evaluation of ECB's monetary policy”. Journal of International Finance & Economics, Vol Issue pp.115-119. Garcia-Iglesias J.M the European Central Bank decided its early monetary policy?” Applied Economics, Vol Issue pp.927-36. Surico P Monetary Policy of the European Central Bank”. Scandinavian Journal of Economics, Vol Issue pp.115-35. Bini Smaghi L “Central Bank Independence in the EU: From Theory to Practice”. [...]

[...] The most common one, and that of the ESCB, is interest rates. Indeed, when the central bank estimates that the economy is growing too fast and so threatens price stability, the central bank raises interest rates in order to dampen demand. On the contrary when it estimates that it is growing too slowly, possibly causing unemployment and deflation, the central bank lowers the interest rate in order to stimulate demand (Sardoni and Wray, 2006). The ECB bases these estimations on the pillars”, economic and monetary analyses[1]. [...]