He has been monitoring 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: control inflation, so that it would be stable around 2%. Have you fulfilled your role?
In appearance, yes. The euro is a success, used by 350 million people in twenty countries and is the second currency on the planet. Likewise, in the last 25 years the inflation rate in the euro area has stood 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, at 7% in April, it is too high.
Inflation is now an unwanted guest spoiling the birthday party in Frankfurt. As Mecano's song said, "He didn't invite me, but I went / I snuck in there and I stood up at your party".
It is not the first existential crisis suffered by the ECB. When the Dutchman Wim Duisenberg initially took over, the eurozone was preparing for enlargement and the economic cycle, with the advent of the internet, was expansive. The members of the euro were 11, almost half the number now. Then came the 9/11 attacks, the dot-com bubble and the financial crisis of 2008. Jean Claude Trichet, his successor, raised rates on the eve of a recession and Europe was caught in the crisis.
At first it seemed that in the ECB's mind only inflation mattered. 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 became clear when in 2019 the current president, Christine Lagarde, said that the risk premium was not part of the bank's mandate. She had to turn back the next day, to avoid a collapse of the bags. Previously, it was Mario Draghi who had to resort in 2012 to his famous “whatever it takes” and expansionary policies to get out of the sovereign debt crisis.
In a word, today the ECB has assumed a greater role than that for which it was created. Proof of this is that with the attacks on the Twin Towers (2001) or with the covid (2020) we witness concerted actions by the three largest central banks on the planet, which had no intention of controlling inflation, but rather avoiding the collapse of the real economy.
Without reaching the levels of the Federal Reserve, which is also aware of economic growth (and closely monitors both the unemployment rate and inflation), today the ECB extends its dominance: it buys state debt, makes policy calls prosecutors, supervises banks and, as a novelty, sets foot in technological advances such as digital currencies.
"Unfortunately, the ECB has seen its independence deteriorate," comments an investor from Barcelona. "The institution has acted late when it comes to recognizing the problem of inflation and does not transmit the solidity that it should."
Indeed, the ECB has only managed in these 25 years to maintain inflation at 2% for 16 months out of a total of 300. Even if we add some oscillations in which the inflation rate moved between 1.9% and 2, 1%, at most it would reach 51 months. In other words, in 83% of the time elapsed since its creation, the bank did not achieve its objective. None of the four presidents who have passed through the ECB has fulfilled the bank's mandate.
They say that central bankers have no heart. But its 4,200 employees (ten times more than in its beginnings) do have it. A few days ago they were negotiating a 4% wage increase, including the threat of a strike, they too were concerned that the ECB would not be able to stop the rise in prices.