In recent months, the European Central Bank's (ECB) monetary policy has become the subject of heightened scrutiny and intense public debate. Some hold that monetary policy is faced with a scarcity of instruments; others argue that the ECB is stretching its mandate, deploying its monetary tools arbitrarily as well as inappropriately. But why did the ECB behave like it did and embarked on various forms of unconventional monetary policies, such as enhanced credit support and the OMT program? Yves Mersch, Member of the ECB’s Executive Board, addressed this question in a SAFE Policy Lecture entitled “Monetary Policy in the Euro Area: Scope, Principles and Limits” which took place in Brussels on 20 June 2016. In his keynote speech and the ensuing debate, moderated by Hans-Helmut Kotz, SAFE Policy Center, Mersch discussed the ECB's choice of instruments – as well as the binding boundaries of its policy as defined by the Eurosystem's legal framework.
Mersch emphasized that the ECB’s only objective with regard to whatever action it takes is and must always be the pursuit of price stability. Although the ECB, as part of its independence, has been assigned a broad range of tools in order to achieve this objective, it needs to comply with public law by which it has been constituted. This rule of law requires all measures to be adequate and necessary, transparent in terms of why they were leading to price stability as well as appropriate in this regard. In accordance with the principle of proportionality, the ECB would need to perform a cost-benefit analysis that is supplemented by an assessment of a measure’s potential negative impact, including appropriate mitigating measures such as, for example, issuer limits and blackout periods when buying securities. Further, as a consequence of the principle that the Eurozone is an open market economy, the ECB may, for example, not buy securities in the primary market.
Despite this long catalogue of criteria for the individual assessment of each measure, Mersch called upon taking a holistic view on the interplay with other measures. Monetary policy would neither replace fiscal consolidation nor would it substitute functioning market standards. Although Mersch confirmed that the ECB will keep up its current policy as long as the inflation targets have not been reached in a sustainable way, he acknowledged that monetary policy measures are no long-term tools and should be terminated as soon as they have become redundant. However, in Mersch’s view, they have been an appropriate response to overcome the lack of credibility in other policy areas and among credit institutions.