Home > Europe, Monetary Policy > “The ECB has Delivered” (A Depression)

“The ECB has Delivered” (A Depression)

I liked the heading used in Draghi’s speech this week

Five years of monetary policy – the ECB has delivered

In the last five years, the ECB has continued to take the necessary measures with a view to maintaining price stability in the euro area.

The narrative for 2011 is fun:

Initially, while the economic impact of the sovereign debt crisis was limited and largely confined to vulnerable economies, the rapid global recovery put upside pressure on energy prices. This drove up inflation also in the euro area. We decided to raise interest rates in early 2011 given upside risks to the medium term inflation outlook stemming from energy prices and from ample monetary liquidity.

So you raised rates to fight an energy supply shock and “ample monetary liquidity”.  How did that work out?

However, the sovereign debt crisis deepened and the euro area entered a second recession.

Oh.  “However” is a bit out of place, don’t you think?  “Naturally” would work better.  We raised interest rates and naturally the Euro area then entered a second recession.

The inflationary pressures that had emerged before receded.

What a relief, bonuses all round, job well done.

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Categories: Europe, Monetary Policy
  1. Rajat
    March 4, 2014 at 10:37

    Amazing how few central bankers actually seem to understand anything about monetary economics. Yet by the sounds of it, people like Draghi will go that way to their graves.

    • March 5, 2014 at 09:28

      Rajat, I saw the Aus nominal GDP numbers! 4.4% growth y/y – are things getting better down under, it looked a bit shaky not long ago?

      • Rajat
        March 5, 2014 at 10:28

        Yes, looking a little better. NGDP actually 4.8% seas adj y/y, 4.4% y/y trend. But call me fussy, pre-2009, that’s still the lowest y/y growth since June 1998. Some is inventories and some is a higher ToT. The big concern here is the ‘(mining) capex cliff’, with mining capex expected to fall from 8% of GDP (a record high) to 2-3% over the next year or two. Things are okay for now, but some people are talking about rate rises in the next few months, which I think would be a mistake,

      • Rajat
        March 5, 2014 at 23:19

        BTW, the best blog on the Australian economy is http://ricardianambivalence.com/
        Ricardo has just posted on the recent GDP figures and reiterated his view that the RBA should reintroduce an easing bias.

      • March 6, 2014 at 08:09

        Thank you, that is very helpful. The unemployment figures look bad.

  2. SK
    March 4, 2014 at 10:56

    I think it is more of a case that the CBs are limited by the political inability to get the consensus for the right decisions to be made.
    Half-measures and short-term fixes only.
    This is happening in ECB/ BoE and the Fed. And sadly some of the measures they implement selecting winners and loosers.

  3. CdnExpat
    March 4, 2014 at 16:27

    It does seem ridiculous doesn’t it? But unfortunately, there is nothing in the ECB’s mandate that allows it to put supporting aggregate demand above stabilizing prices. They call that a feature; anyone else would call it a bug.

  4. March 5, 2014 at 01:34

    Rajat, yes that appears to be true.

    SK, there cannot be a less politically constrained central bank in the developed world than the ECB. They deposed Berlusconi!

    CdnExpat, they can interpret “price stability” however they like, the tight focus on “2% or less HICP” is their choice, and Europe’s funeral. They could have better supported AD by targeting the HICP-CT, probably a price level target, a GDP deflator target, I’m sure there are a lot of better choices.

  5. Benjamin Cole
    March 6, 2014 at 11:35

    Excellent blogging.

    There is something wrong with Europe having a central bank—how is a Portuguese, or Spaniard, Italian or Greek supposed to vote for better monetary policy? The ECB has made the decision to remove monetary policy from popular (even if representative) control—yet monetary policy is arguably the most important macroeconomic policy.

    Is this democracy?

    The problem of clarity transparency and accountability is bad enough in the USA, but in Europe…what a mess.

    I see not future for the PIGS until they vamoose from the ECB. In fact I would say that every nation needs to have a central bank, it is one of the powers of the sovereign.

    Now, you can have the awful situation of Greeks rampaging in the streets, or enduring 25 percent unemployment, and yet even if Greek pols wanted to pursue a more-aggressive monetary policy, they cannot.

    The ECB fails the basic fundamentals of democracy: Transparency, clarity, predictability, accountability.

  6. March 6, 2014 at 16:14

    Thanks Ben, and jolly good. You remind me of a certain PM’s final speech to Parliament:

    “The point of that kind of Europe with a central bank is no democracy, taking powers away from every single Parliament, and having a single currency, a monetary policy and interest rates which take all political power away from us”

  1. March 4, 2014 at 18:36

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