(Monetary dialogue with the ECB: download European Parliament Briefing Paper July 2014)
This paper discusses the challenges of euro-area monetary policy in the current macroeconomic environment of subdued growth, very low inflation and featuring at the same time a strong currency. The paper argues that ECB monetary policy should focus on the internal monetary policy objective, that is the ECB should stick to its primary mandate of ensuring price stability for the euro area as a whole. The exchange rate of the Euro is not a policy target of the European Central Bank and the use of the monetary policy toolkit to address the external target is not risk-free.
This paper has discussed whether it is advisable for ECB monetary policy to affect the level of the Euro in the current macroeconomic conditions of low growth and low inflation. The paper briefly assessed the pros and cons and concluded with reservations for the ECB to use such an option. The main reservation stems from the fact that the ECB primary mandate is to guarantee price stability (domestic monetary policy objective). And at the current juncture, jointly assessing the business cycle position of an economy and its financial stability conditions is a daunting task; those conditions may suddenly change, impeding in the near future the use of monetary policy for the external objective without breaching the ECB primary mandate. Moreover, by engaging in external monetary policy, the ECB might be easing the pressure on political leaders in various European countries to pursue the necessary structural reforms. The process of disinflation in the southern countries is painful and is likely to remain so for quite a while. There is no easy way out. While a cheaper Euro would help to resume growth both in the periphery and the euro-area as a whole, the level of the Euro shall not be considered a policy target by the ECB.