In order to do so, 2% target inflation has been settled (i.e. below but close to 2%). Several issues have been raised regarding both the 2% target itself and, on a wider perspective, whether inflation should be the main ECB target.
ECB’s competences
Until now the ECB has exclusive competence for Monetary Policy and work in concert with the European System of Central Banks ( composed by the 27 EU National Central Banks) and with the Eurosystem (composed by the National Central Banks of the countries that adopted the Euro) to achieve its price stability objective.
Without prejudice to this first objective the ECB defines its policy in order to boost employment and growth. The main reasoning is that since the European Union does not have a federal budget and has within its borders economies under both different economical cycles and stages of development, the main result that can be achieved is to promote price stability. This is a necessary condition for both job growth and job creation (although not sufficient on its own) and allows a higher degree of certainty for the economic operators as well as lower interest rates.
ECB’s independence undermined
As for the latter issue the Portuguese presidency has rephrased the articles regarding the ECB with respect to what was proposed during the 2004 Intergovernmental Conference. In particular the ECB has been listed together with other EU institutions and the sentence “The European Central Bank is an institution” has been removed. President J.C. Trichet is clearly concerned about these developments and especially sees that this could lead to a lower degree of independence of the ECB from other European institutions and especially from national governments.
French President Nicolas Sarkozy has already shown on several occasions his wish to have an ECB taking more into account the European economic situation while setting its monetary policy objectives, and in particular would like to have a bigger say on the setting of the exchange rate with the US dollar and on the inflation target.
Conclusion
Of course lowering the degree of independence of the ECB is a serious risk as it could lead to a less credible monetary policy. Moreover, if political pressure was to be allowed, smaller countries might end up with an EU monetary policy more synchronized with the cycle of the biggest EU economies instead of a neutral pro-EU development one. In the worst scenario the ECB could be even pushed to follow the political or electoral cycles of the biggest EU countries.
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