Monetary policy

If Not Now, When?

Federal Reserve Jackson Hole Economic Symposium
Mario Draghi at the Economic Policy Symposium in Jackson Hole. Source: Bloomberg

Anyone hoping Mario Draghi would send a signal from the US resort town of Jackson Hole was disappointed. The president of the European Central Bank (ECB) offered no fresh insight into if or when it would reduce its billions in bond purchases.

That’s hardly surprising. For Mr. Draghi to set a course at the central bankers’ meeting in Wyoming would mean presenting the rest of the ECB Council with a fait accompli before its meeting in September.

But Mr. Draghi shouldn’t delay a decision much longer. Present economic conditions are favorable and Europe is experiencing a window of relative political stability that won’t last forever.

The ECB should take the opportunity in September to announce its intention to end bond purchases in 2018. Of course, the ECB must proceed with caution so the market doesn’t react all at once. But this is an ideal moment.

France has held its election, Germany will vote on September 24, and early elections in Italy are now off the table. As a result, political stability prevails in the most important euro countries.

The ECB probably saved the euro from collapse but its role has outgrown its capabilities.

Monetary policy should not be geared toward election dates but, indirectly, they do play an important role. Political uncertainty curbs growth, price development and the effects of monetary policy. A central bank can’t ignore this.

There have been many examples of this effect, including the crisis in Greece after Alexis Tsipras was elected prime minister, the impact of the Brexit vote, and uncertainty ahead of the French presidential election.

The current calm is also ideal for an urgently needed redistribution of roles. Lawmakers must take greater responsibility for the future of the monetary union, relieving the ECB of some of the burden. The euro countries are now better able to take action than for a long time.

The euro zone crisis saw the ECB step in when lawmakers ran out of options. It probably saved the euro from collapse and averted a spiral of declining prices and wages. But resorting to extraordinary emergency tools such as massive bond purchases means its role has outgrown its capabilities.

The ECB can’t solve the euro zone’s structural problems. All it can do is buy time. Only policymakers can implement reform. Ending the bond-purchasing program would send the right signal for this to happen.

If the ECB doesn’t act now, when will it?


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