Written by Angelos Delivorias
According to Article 127(1) of the Treaty on the Functioning of the European Union, ‘the primary objective of the European System of Central Banks [i.e. the European Central Bank and the national central banks of all EU Member States] shall be to maintain price stability.’
To pursue that objective, the European Central Bank follows a monetary policy strategy which is based on a quantitative definition of price stability and a monetary and economic analysis of the developments in the euro area economy.
The policy is then channelled to the real economy via a transmission mechanism which operates mainly through interest rate setting and market expectations.
To steer interest rates and signal monetary policy intentions, the Eurosystem [i.e. the European Central Bank and the (currently 19) national central banks of the EU Member States whose currency is the euro] disposes of a set of instruments and procedures (the operational framework), which comprises open market operations, standing facilities and minimum reserve requirements.
From its beginnings in 1999 until the global financial crisis, the European Central Bank conducted its monetary policy mainly through the use of ‘standard’ measures. Since 2008, however, it has faced considerable challenges, which prompted it to adopt various ‘non-standard’ measures: the Enhanced Credit Support, the Securities Markets Programme, Outright Monetary Transactions, and the Expanded Asset Purchase Programme, to name but a few.
Due to their non-standard character, these measures have attracted both praise and criticism. The discussion of their effectiveness, however, points also to the inherent limits of monetary policy. As Mario Draghi, President of the ECB, summed up during a press conference on 22 January: ‘What monetary policy can do is to create the basis for growth (…) it’s now up to the governments to implement these structural reforms, and the more they do, the more effective will be our monetary policy’.