The European Central Bank. Less bashing, please

THE European Central Bank is everybody's favourite scapegoat for the euro area's feeble growth. The 12 countries' GDP grew by only 1.3% in the year to the first quarter, one-third the pace in America, and yet still the ECB left interest rates unchanged last week, at 2%, for the 25th month. No wonder many people think the bank is run by inflation fanatics, unwilling to cut interest rates regardless of the lack of growth. ECB, it is joked, stands for “exceedingly cautious bunglers”.

Yet the bank has actually done a better job than is generally thought. Many critics (including at times this newspaper) have argued that the ECB has been too slow to cut interest rates. In fact, by most measures its policy has been fairly loose. Currently, real short-term interest rates are close to their lowest for more than 25 years, and long-term bond yields, which affect demand just as much as short-term rates, have fallen by more than a percentage point over the past year. Even the euro, which surged in 2004, is now (in trade-weighted terms) just below its level when the single currency was launched. So it is ludicrous to suggest that monetary policy is strangling Europe's economies. The blame ought to be laid on tight fiscal policies and a host of structural rigidities.

The ECB also deserves credit for the way that it managed the largest merger in history, involving no fewer than 12 central banks, and introduced a currency across those same countries, simultaneously providing a firm anchor for inflation expectations. Before the euro succeeded, there was widespread concern that it would be hobbled by high inflation.

But this is not to say that the ECB is perfect: far from it. The bank's problems lie less in its actual interest-rate decisions than in its poor public communication, its apparent lack of flexibility and its excessive independence, all of which make it an easy target to attack.

The constantly hawkish tone of its monetary policy statements give the impression that the ECB focuses only on inflation and does not care about growth. Yet several studies suggest that there is little significant difference in the way the ECB and America's Federal Reserve respond to changes in output and inflation. There is, however, a big difference in their respective language, and this matters. If you hold interest rates low, but keep warning, as the ECB has done, about the need to remain “vigilant” against the threat of inflation, then neither households nor companies are likely to rush out and spend.

The ECB's excessive degree of independence also adds to its hair-shirt image. In most other countries with inflation targets, politicians, not bankers, define the goal. The ECB sets its own target, and the effects of this freedom have been worsened by its formula of “below, but close to, 2%”, which has rightly been ridiculed. Since inflation has in fact been 2% or above most of the time, the ECB might more sensibly express the target as a range around a mid-point of 2%. The Maastricht treaty says that the ECB cannot take instructions from finance ministers. But there is nothing stopping it from asking for their formal blessing for a revised target. If ministers accepted even that limited responsibility for the target, they would then find it harder to criticise the bank's interest-rate policy.

The bank's accountability would also be increased if it were to publish minutes of its meetings. The regular press conference, a ritual in which journalists try to force Jean-Claude Trichet, the ECB's wily president, to say things he doesn't want to utter, is no substitute. Minutes would help to show that different views were discussed at a meeting, whereas today's bland announcements imply that decisions were unanimous, which can make the bank appear out of touch. Likewise, it is surely time for the ECB to adopt majority voting. At present it requires a consensus among all 18 members of its governing council, which undoubtedly militates against change.

No more sucking of thumbs

The ECB boasts that low government bond yields are evidence of its success in establishing its anti-inflation credentials. But this definition of success is too narrow. The pursuit of price stability is a means to an end (to achieve maximum sustainable growth), not an end in itself. While the ECB's prime task is price stability, it is also legally charged with supporting growth. Last year it could have cut interest rates to offset the impact of the rising euro; today it should stand ready to ease monetary policy to cushion the impact of structural reform and fiscal discipline. The ECB is no longer an infant central bank. Having gained its credibility, it now needs to make better use of it. In short, it is time for the ECB to grow up.

Editorial says it is time to defend the European Central Bank - and to tell it to grow up.

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