Analysis: “ECB reviewing its monetary policy strategy” by Marijn van der Sluis
Last week, the Governing Council of the ECB announced it would review its monetary policy strategy. The monetary policy strategy includes a definition of price stability and sets out the analytical pillars used to determine how to reach that goal. The decision to carry out the review is the first feat of the new President of the ECB, Christine Lagarde. The meeting of the Governing Council was the first one for two other members of the Executive Board, Isabel Schnabel and Fabio Panetta. The review is scheduled to be completed by the end of the year.
The review of the monetary policy strategy will include, among other things, the definition of price stability. Article 127 TFEU defines the primary objective of the European System of Central Banks (‘ESCB’) as maintaining price stability. Although this is a rather narrow objective, as it, for example, does not include the objective of maintaining high employment rates, it requires further specification. As the narrow objective is a limitation of the ECB’s powers, the interpretation by the ECB of what constitutes price stability is an important first step in the assessments of the legality of ECB action. More on that below.
‘Below, but close to, 2% over the medium term’
In 1998, price stability was defined as ‘a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term’. At the review of the monetary policy strategy in 2003, this definition was amended, so that monetary policy would aim at a level of inflation ‘below, but close to, 2% over the medium term’. Economists have complained that the ECB’s past failures to achieve this level of inflation damages the credibility of monetary policy. According to the ECB press release, the quantitative definition of price stability will ‘feature prominently’ in the review. In the Q&A after the Governing Council meeting, President Lagarde also indicated that the way inflation is measured will be examined. In particular, she mentioned the way in which housing costs are included in these measurements.
Another prominent aspect of the review will be the possible incorporation of sustainability goals within the monetary policy strategy of the ECB. Since Governor of the Bank of England Mark Carney put the issue of sustainability on the monetary policy agenda in 2015, a debate has been ongoing on the extent to which central banks can or should be engaged in climate change mitigation. For the ECB, this debate centres on whether climate change mitigation can be seen as part of its primary objective or its secondary objective (to support the general economic policies in the EU). If it is part of the secondary objective, the ECB must show that pursuing climate change mitigation strategies do not interfere with the objective of price stability. If it is part of the primary mandate, a balancing between stability in the short term and long term is appropriate, thus giving more leeway for the ECB to take forceful action. Another matter is Article 11 TFEU, according to which environmental protection shall be included in the definition and implementation of the EU’s policies. It is not clear from a legal point of view whether/how monetary policy, with its distinct institutional and legal characteristics, is bound by this obligation.
Another topic is through which tools sustainability goals might be accomplished. It may be expected that the ECB will lean heavily on other EU initiatives, such as the recent agreement between the European Parliament and the Council on a taxonomy for sustainable economic activities.
Monetary policy toolkit
The Governing Council also decided to review the effectiveness and side effects of the monetary policy toolkit, as developed over the past decade. In the same meeting, the Governing Council decided to leave unchanged the current monetary policy tools, which include the contentious negative rates for the deposit facility and the Asset Purchases Program at 20 billion EUR per month.
Coincidentally, the German Constitutional Court also announced on Thursday that its judgment on the Public Sector Purchases Program, part of the Asset Purchases Program, will be handed down on 24 March 2020 at 10am. The CJEU has already approved the purchase of government bonds by the ESCB on the secondary markets in the past, in its Weiss judgement (C-493/17) in response to the second ever request for a preliminary ruling by the German Constitutional Court.
The review will thus have to navigate highly politicised and legally contentious waters. Although the German Constitutional Court ultimately accepted the legality of the Outright Monetary Purchases Programme (‘OMT’) after the first preliminary reference, discontent remains. The resignation of Executive Board member Sabine Lautenschlager in September 2019 was testimony to the German disapproval of loose monetary policy. As the current programmes under review are not deemed as essential to the survival of the euro as OMT was, now might be the moment when the German Constitutional Court tries to set specific limits to what the Bundesbank may do as part of the ESCB. The review is therefore part of the ongoing struggle over the limits of monetary policy in the Eurozone.
Dr. Marijn van der Sluis is Assistant Professor in Constitutional Law at Maastricht University. He writes on constitutional law, European integration and economic law. In 2017, he defended his thesis at the European University Institute: “In Law We Trust: The role of EU Constitutional Law in European Monetary Integration”. Recent publications include a case note of the Weiss-case for Legal Issues of Economic Integration and a working paper on the ongoing negotiations of the Eurozone budget (the Budgetary Instrument for Convergence and Competitiveness) for the Maastricht Working Paper Series.