Changes from report parliamentary committee draft to plenary report

For more than a decennium, since the Great Recession of 2008, the euro area has only known very moderate inflation numbers. The self-imposed inflation target of 2% was hardly reached. During this era, the ECB tried to ignite the European economy by injecting considerable amounts of liquidity in the markets. Quantitative easing was the recipe of the day, low (even negative) interest and asset purchasing programmes its ingredients.

Whether the envisaged ignition truly worked, is questionable. Productivity growth, as well as its innovation rate remained rather flat at just short of 1%. Other advanced economies were able to score better results.

Other side effects of these policies were ever higher amounts of accumulated debt, be it for households, businesses or governments. The low interest rates left room for highly indebted countries to comfortably pursue the needed reforms or bring down government and deficits. However, here as well, the results are rather bleak. The persistent low interest rate gave all too much comfort and gave little proper incentive to pursue growth-enhancing reforms. The feeble enforcement of the Stability Growth Pact clearly did not help either. Public debt remains very high, housing prices have been skyrocketing, zombie firms roam through the economy, while interest rates did little to save people’s savings.

In the comfort zone of easy money, geopolitical stability, relatively open global trade and ‘business as usual’, policy makers discovered new ideas and alibis for expansive fiscal and monetary programs, such as the - in se surely legitimate - fight against climate change. Even though the EU only accounts for 8% of global CO2 emissions, extensive and capital intensive programs were launched. The low interest rate environment would ease the cost of the necessary investments and the ECB was encouraged to share this point of view. In a time where price stability was almost a given, giving more attention to what the ECB mandate describes as ‘other general economic policies of the Union’, seemed attractive.

At least, until Mr. Xi’s Covid-19 virus and the subsequent lockdowns disrupted severely the deeply intertwined global supply chains. Two years later, Mr. Putin’s aggression towards Ukraine did the same for the energy landscape. Supply and demand were no longer evenly matched, prices started to rise, inflation hiked to double digit figures. Government programmes, set up in the aftermath of the Covid and energy crisis to ease the cost of the supply shocks, only added fuel to the inflationary fire. Meanwhile, the Green Deal, and foremost the costly and little flexible way it was designed, kept dominating the Brussels agenda. At the same time, legislators in Washington found agreement on a large, yet more flexible, market neutral program that would do little to curb inflation: the Inflation Reduction Act.

Even though price stability is the first and almost only mandate of the ECB, the institution observed that the inflation, that was making so much havoc amongst people and business alike, was only ‘transitory’. For all too long, the ECB seemed stuck in some sort of ‘path dependency’ and did little to nothing to fight inflation, even though other central banks were already starting to raise their interest rates. The results were damaging: industries cutting investments in the EU, or even relocating their business to other major trading blocs or just passing through the cost of inflation on their consumers, which later would be called ‘greedflation’ by the ECB.

Ultimately, the ECB stopped its quantitative easing in the summer of 2022 with several interest rate hikes the last year. Headline inflation has come down, however, core inflation remains persistently high and is far above the inflation target of 2%. The ‘transitory’ inflation seems to be quite sticky, yet interest rates are still below the inflation rate.

In a world that all the more becomes more fragmented and even turns towards protectionism, where a subsidy race is looming, a green and digital transition is taking place and second round effects of inflation are on the horizon, Europe is rediscovering the virtue of having a geopolitical mindset and the importance of manufacturing industries, resulting in industrial policies. It is now more clear than ever that price stability really must be at the very core of the ECB policy making. Only price stability creates the conditions for attracting long term investments.

The Treaty grants the ECB independence from political influence to achieve this price stability. However, with independence comes responsibility. Failing on delivering on its prime mandate would be devastating for the legitimacy the ECB has with the public.

In this regard, it is applaudable that ECB president Lagarde shows no ambiguity in her message that she will fight and keep fighting inflation, yet at the same time indicates that the models of the past may no longer be fit for purpose in the future. Indeed, looking back at the history of the inflation target and its estimations, it is clear that the 2% norm was rather utopial. A proper reassessment of the models, as well as the role these models play in policy making is needed. The same goes for the self-imposed 2% norm in the medium term. What scientific evidence backs this target, while also being able to weather out the test of reality? Perhaps a more qualitative approach is more suited.

Other topics deserve attention from the ECB and/or the public as well, such as the question whether the monetary union would really benefit from the introduction of a digital euro, whether public finances would favour from the proposed rules in the economic governance package and whether the risks that the shadow banking sector or the crypto industry are sufficiently regulated, monitored and contained, just to name a few.