Tuesday, May 08, 2007

Questioning ECB Independence

The EU's finance ministers have started pushing back against some of the relatively anti-ECB (European Central Bank) rhetoric that Nicholas Sarkozy has used recently. The Financial Times has the story:
Ministers warn Sarkozy on Central Bank

European finance ministers on Tuesday issued a concerted warning to Nicolas Sarkozy to stop undermining the European Central Bank by blaming it for France’s economic problems, in a determined defence of the bank’s independence.

The incoming French president was warned there was no enthusiasm for his election calls for the ECB’s mandate to be amended to focus it on creating jobs and growth as well as fighting inflation.

...Mr Sarkozy, a former French finance minister, has blamed the ECB’s obsession with fighting “inflation that doesn’t exist” for forcing up interest rates and the value of the euro against the dollar and other world currencies. He has echoed concerns from French exporters, including Airbus and Air Liquide, that they are being priced out of world markets. “Independence doesn’t mean indifference,” Mr Sarkozy said last December.

On Tuesday, a number of Mr Sarkozy’s former Ecofin colleagues rejected his ideas. Wouter Bos, Dutch finance minister, said the new French president could “increase the pressure but it is not a good idea”. Wilhelm Molterer, Austria’s finance minister, said: “No politician should put pressure on the ECB. The ECB is an independent bank.”

...Daniel Gros, director of the Centre for European Policy Studies, said he expected Mr Sarkozy to lay off the ECB for a while but that it was a convenient “scapegoat” if France’s economy does not take off.

“If he does it for domestic consumption it doesn’t really matter, but if he really wants to make an impact and links ECB reform to his support for a new treaty, it does start to matter.”
While I think most macroeconomists would agree that a highly independent central bank is probably a great thing to have to keep inflation-expectations down, I must confess that I am a bit sympathetic to Sarkozy's complaints. The ECB has seemed rather stingy in setting interest rate policy over the past few years, particularly given that inflation in Europe has been extremely low - generally a solid percentage point below inflation in the US.

But on the other hand, there is some plausible logic that suggests that perhaps it made sense for the ECB to be tougher on inflation than the Fed would have been under similar circumstances. Since the ECB is new, it has had to establish and solidify its inflation-fighting credentials. Furthermore, it may be the case that (in many parts of the Euro-area, at least) inflation expectations are more prone to rising than they are in the US, due to a consistent history of sustained bouts of moderate inflation in several euro countries.

It seems clear that Sarkozy would not be able to initiate any major changes to the ECB's charter, even if he really wanted to. But the fact that his rhetoric was so successful serves as another good reminder that huge swathes of the public - even in France, which has been right at the heart of the formation of the EU ever since its inception in the 1950s - are skeptical, nervous, and often downright grumpy at the compromises that they've been forced to make in order to forge the European Union.

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