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2017 | OriginalPaper | Chapter

3. Monetary Policy and the European Central Bank: A Progressive Divorce from the Bundesbank Legacy?

Authors : Enrico Marelli, Marcello Signorelli

Published in: Europe and the Euro

Publisher: Springer International Publishing

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Abstract

This chapter begins with consideration of the key features of the European Central Bank (ECB), from its institutional set-up to its main economic features (such as the much debated independence and conservatism). The ECB’s operation and behaviour – concerning inflation (and other final goals), monetary strategies and key instruments (key interest rates) – are investigated through comparisons with those of other central banks (in particular the Federal Reserve in the United States).

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previous chapter The European Monetary Union and OCA Theories: A Common Currency Awaiting a Real Economic Union

next chapter Fiscal Policies and the EU’s Governance: Only Rules and a Lack of Stabilisation Measures

The Exchange-rate mechanism II pertains to the new European Monetary System (see Chap. 2), which has been maintained for non-euro countries that prefer to peg their exchange rate to the euro (this is, e.g. the case of Denmark). In addition, the presence for at least 2 years in the ERM-II is one of the conditions required to EU members for joining the euro (as happened to the eight countries adopting the euro after the year 2000).

However in recent speeches, as we shall emphasize in the next chapters, President Draghi has stated the importance not only of structural reforms but also of policies of aggregate demand management (countercyclical policies).

The requirement to be ‘close to 2%’ was added in a reform introduced in 2003.

See ECB, European Central Bank (2006)

See ECB (2008).

There are also longer term refinancing operations, fine-tuning operations, structural operations.

Some other instruments of the ECB’s monetary policy include the reserve requirements (imposed on all euro area credit institutions), operations on exchange rates, the management of official reserves, the supervision of payment systems, and many others (for further details see the https://www.ecb.europa.eu/mopo/intro/html/index.en.html page on the ECB website). The new supervision system of banks introduced in the Eurozone in 2012 and the ‘banking union’ will be discussed in Chap. 6.

As we shall see in Chap. 6, the overnight deposit rate was set to zero in the summer of 2012; it then became negative since the summer of 2014.

A negative inflation rate appeared in 2009, the period of the Great Recession, and again in some months from the end of 2014 to 2016; although the average inflation rate was around zero (e.g. in 2015 in the entire Eurozone), in some countries it became more decidedly negative.

At the beginning of this period a recession hit several countries. Moreover, in those years many Eurozone countries adopted restrictive fiscal and monetary policies in order to respect the Maastricht criteria and to be admitted to the EMU.

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Title: Monetary Policy and the European Central Bank: A Progressive Divorce from the Bundesbank Legacy?
Authors: Enrico Marelli
Marcello Signorelli
Publisher: Springer International Publishing
Book: Europe and the Euro
Print ISBN: 978-3-319-45728-4

Electronic ISBN: 978-3-319-45729-1

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-45729-1_3