The ECB Strategy Review – exorcising the ghosts of crises past

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The European Central Bank's strategy review is a chance for the EU to exorcise its past mistakes in developing monetary union, writes Anna Peychev. [Armando Babani/EPA/EFE]

The European Central Bank’s strategy review is a chance for the EU to exorcise its past mistakes in developing monetary union, writes Anna Peychev.

Anna Peychev is a Visiting Fellow with the Wilfried Martens Centre for European Studies

If the outcome of the US Presidential election should mean anything to the EU establishment, it is that now is definitely not the time to quarrel with one’s own central bank. A decade after the global financial crisis, the two economic behemoths are again to square off in an economic recovery contest, whose previous iteration did not bode well for the Old continent.

So far, the cross-Atlantic experience has been shared – both the Fed and ECB have embraced expansionary monetary policy and made repeated calls for a corresponding fiscal effort in response to the economic shock of the pandemic.

But unlike Europe, where Next Generation financial aid remains hostage to political volatility and a regulatory framework transfixed on fiscal consolidation, a Democratic White House is a good indicator the country is on track for long-term alignment of its fiscal and monetary efforts towards sustained recovery.

With its monetary policy Strategy Review the ECB is working hard to avoid a repeat of history. The exercise is set to recalibrate the Economic and Monetary Union (EMU), shaking up long-held assumptions and causing far-reaching political consequences along the way.

A (r)evolution seventeen years in the making, the Review is the inevitable response to the growing incompatibility between the obsolete economic model entrenched with the Treaty of Maastricht and economic reality of the last decade or so.

Nowadays, instead of combating inflation, the ECB is trying to stimulate it. Instead of tinkering with interest rates, it busies itself loading up balance sheets with sovereign debt and corporate assets.

Instead of urging fiscal conservatism, the ECB encourages public spending, its President claiming that current anxieties over debt indicators should be strictly limited to the serviceability of debt and the maturity of bond emissions.

But not everyone is on board. Although the demise of the Maastricht compromise has been on an independent trajectory of its own, the pandemic has provided the EU with a false sense of security that surely, this too – like the sovereign debt crisis – shall pass. Unable to cope with the loss, the reaction has been an outright denial of reality.

Symptoms have included high-pitched calls for early consolidation of the recovery effort and plans to exorcise the evil spirit of debt from the frail body politic of the Union through another round of fiscal discipline as soon as possible.

For safe measure, the ECB is being dragged through German courts by ‘guardians of the market’, who seem to have found an amenable outlet for their righteous indignations.

But resistance is futile.

The political economy of the EU has always been under the dominant custody and prerogative of the Bank – the result of member states’ mutual distrust at the dawn of EMU. The Bank enjoys a great deal of discretion loosely anchored through its price stability objective.

It was simply trusted to ‘do the right thing’ with the answers readily assumed under misguided expectations that the economic conditions of the late monetary consensus will endure in perpetuity. But they have not.

In this brave new world, the Bank is not only legally entitled to redraw the bounds of EMU, but – in fact – obliged to do so by its mandate.

The Strategy Review will be completed by the fall of 2021. As part of the ongoing effort of its twelve workstreams, the ECB has already signalled extensive reforms with clear ramifications for fiscal and economic policy.

These ideas – and Ms Lagarde herself – are making policymakers across Europe uncomfortable and raising accusations that the Bank is acting ‘politically’ or ‘illegally.’

Not incidentally, the greatest pushback comes from countries that had fared quite well under the defunct Maastricht compromise and for whom the evolution of monetary policy is tantamount to forced integration.

But the Strategy Review is actually just forced reality. Its outcome will compel corresponding adjustments throughout the rest of the EMU framework and accompanying political discourse.

If the EU leadership wants to avoid a repeat of the increased economic divergences and dragged out recession in the aftermath of the sovereign debt crisis, they will have to decide whether sustaining the EMU project is worth sacrificing long-held, morally entrenched and now economically obsolete beliefs about debt and solidarity.

But unless they are willing to sacrifice the euro – and associated political project along with it – the establishment would be well advised to fast forward through these first few stages of grief over Maastricht and get with the (monetary) programme.

They literally cannot afford to do otherwise.

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