As it turns 25, has the ECB finally become a normal central bank?

Publishing date
05 February 2024
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The job of a central bank in a currency union can be particularly tough. Economic problems in a single member, that would not arise or could be managed easily in a federal state, can threaten the entire currency union. As the European Central Bank discovered during the 2010-12 euro crisis, this can threaten both its primary mandate – price stability – and secondary objectives, such as financial stability. In response, the euro area now has common bank supervision and resolution, the European Stability Mechanism, ECB emergency liquidity instruments for sovereigns and, in principle at least, improved coordination of member-state economic policies.

Are these changes enough to make the ECB’s job more like that of a normal central bank? Since 2012, the policy challenges faced by the ECB and its responses have mostly mirrored those of its counterparts, but with two important exceptions. The ECB’s 2015 decision to start bond purchases came much too late. And the ECB hesitated to raise interest rates, even after the invasion of Ukraine pushed annualised inflation to 7.4%.

These delays had a common cause: the euro area’s political and fiscal fragmentation. The ECB was structurally handicapped by concerns about the distributional impact of bond purchases and about the financial-stability impact of monetary tightening.

The ECB has room to continue evolving and improving; it has already developed tools such as the Transmission Protection Instrument, to intervene in the bond markets of a solvent country that meets specific eligibility criteria. But truly addressing its structural handicap requires changes outside the ECB’s control.

Full fiscal union is neither needed nor likely, but the ECB needs a liquid and safe bond market and some mechanism to ensure that the combined stabilisation effort of fiscal and monetary authorities is sufficient. This will require a larger EU budget involving common bond issuance, effective implementation of the new fiscal governance framework and steps to reduce the exposure of banks to their domestic sovereigns, while providing flexibility in times of stress.

Read the paper 'The Euro at 25: Fit for purpose?' by Lucrezia Reichlin, Jean Pisani-Ferry and Jeromin Zettelmeyer that reviews the record of European Central Bank policymaking since the 2010-12 euro crisis here.

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About the authors

  • Jeromin Zettelmeyer

    Jeromin Zettelmeyer has been Director of Bruegel since September 2022. Born in Madrid in 1964, Jeromin was previously a Deputy Director of the Strategy and Policy Review Department of the International Monetary Fund (IMF). Prior to that, he was Dennis Weatherstone Senior Fellow (2019) and Senior Fellow (2016-19) at the Peterson Institute for International Economics, Director-General for Economic Policy at the German Federal Ministry for Economic Affairs and Energy (2014-16); Director of Research and Deputy Chief Economist at the European Bank for Reconstruction and Development (2008-2014), and an IMF staff member, where he worked in the Research, Western Hemisphere, and European II Departments (1994-2008).

    Jeromin holds a Ph.D. in economics from MIT (1995) and an economics degree from the University of Bonn (1990). He is a Research Fellow in the International Macroeconomics Programme of the Centre for Economic Policy Research (CEPR), and a member of the CEPR’s Research and Policy Network on European economic architecture, which he helped found. He is also a member of CESIfo. He has published widely on topics including financial crises, sovereign debt, economic growth, transition to market, and Europe’s monetary union. His recent research interests include EMU economic architecture, sovereign debt, debt and climate, and the return of economic nationalism in advanced and emerging market countries.    

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