In recent days, President Lagarde has made two important statements. First, the ECB will allow the inflation rate to rise above 2% before raising interest rates. Second, extraordinary measures – e.g. Quantitative Easing – will become permanent. Despite the sudden counterpoint from Weidmann, President of the Bundesbank and member of the Governing Council of the ECB like the other governors of the national central banks, who called for the primary mandate of price stability and to avoid confusing monetary and fiscal policy, other members of the Governing Council they even went beyond Lagarde. For example, Villeroy, governor of the Banquede France, said that “rethinking the second pillar of monetary policy and monitoring a broader set of variables, including nominal GDP and the activities of financial institutions, could help the ECB verify and reconcile its secondary objectives, to starting from financial stability, with its primary mandate of price stability".
Villeroy's reinforcement makes it clear that Lagarde refers to the ECB's responsibility to help achieve the EU's goals. In other words, this suggests that the redefinition of the ECB's strategy and objectives could take it beyond inflation, moving it, in some way, towards a model more similar to that of the Federal Reserve. Is it really so? Before answering, it is appropriate to take a step back and recall how the ECB was built on the Bundesbank model rather than on the Fed model.
When, in the early 2019s, the EU decided to move towards Economic and Monetary Union (EMU), the decision on which model to follow for the ECB took into account both the prevailing thinking and the political conditions in which EMU came to be realized (those who are interested can consult Paul De Grauwe, Economics of the Monetary Union, Il Mulino, XNUMX). There were, in fact, two opposing models: on the one hand, that of the Bundesbank - which had a limited mandate to control inflation -, on the other, that of the Fed - which has a double mandate, to keep inflation under control but also fight unemployment. On the one hand, the dominant economic thinking was monetarist thinking, which emphasized the central bank's role in price control and was skeptical that it could help fight unemployment. On the other hand, the Deutsche Mark being the most stable national currency among those of the countries entering EMU and, in concert, the Bundesbank being the most reputable central bank, Berlin's influence was naturally greater than that of other European capitals. . Therefore, the ECB was born modeled on the Bundesbank and not, as many wanted, on the Fed.
In the following decades many things have changed. In economic thought the monetarist vision has become a minority and the importance of the contribution of monetary policy is recognized not only on prices but also in the fight against unemployment and in ensuring macroeconomic stability in a broader sense. In the reality of economic systems, the global financial crisis, the subsequent inability of rich countries to recover significant growth dynamics and, lastly, the great COVID-19 shock, epochal also in its economic dimension, have called central banks to adopt strongly interventionists, once unthinkable. This has made the Fed model decidedly more effective than the Bundesbank one.
These changed underlying conditions could today favor the convergence of the ECB towards the Fed model, formally sanctioning what, in some way, the ECB is already doing. This transformation will not be easy because the ECB's mandate is not only enshrined in its statute but also in the founding treaties of EMU. Therefore, there will be resistance. However, if we consider that, after years and years of fruitless discussions, the pandemic emergency has made it possible to reach an agreement on the issuance of Eurobonds - that is, the birth of an embryonic Community budgetary policy with the Next Generation EU programme, which we often called Recovery Fund, etc. – it is plausible that resistance will also be overcome on the mandate of the ECB. This would make a further contribution to strengthening the European unification project. The EU is committed to the major project which, with the European Green Deal and interventions for the post-covid recovery, aims to accelerate the sustainable transition in order to help safeguard the environment and social inclusion. Within this wide-ranging transformation, it would make little sense for the ECB to remain entrenched on the sole objective of price stability.
However, there is a caveat, after more than ten years of ultra-expansionary monetary policies it seems that, in recent months, inflation in the USA is rising and, according to some observers, could soon reach 3%. If the recovery of US inflation is confirmed but is limited to 3%, this will not change the situation significantly. However, if inflation were to continue to rise towards 5% and above, then the judgment would change. In that case, various considerations could help slow down or block the evolution of the ECB from the Bundesbank to the Fed model.
