Comment
Is the
ECB condemned to do "everything wrong"?
May 14, 2001
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The ECB does not appear to be able to do anything right. When it held on to its position tightly, everyone wanted it to cut rates. When it finally appeared to delivered a cut perfectly timed for the greatest possible surprise, the reaction is the opposite of what the Fed would have enjoyed. Now several days later, the Euro continues to weaken against the US dollar. Why is this so? It has nothing to do with the personalities or quality that constitutes the ECB. If anything, these men are competent to do their jobs. Rather, the problem lies with the structure and mandate of the ECB, whose traditions it inherited from Europe's national central banks, whose mission in life is achieving price stability, i.e., killing inflation even if they turned out to be imaginary. Unlike the Fed, which has substantial leeway to exercise its discretion, the ECB had held to a fixed target to maintain inflation at less than two percent. These and other constraint means that the bank could not exercise judgment or a modicum of creativity that the Fed does. Now, if most market participants feel that the markets and economies have shifted their behavior, the ECB would be structurally condemned to be behind the curve whatever it does. So when the ECB relaxed rates given that by their definition that could be facing incipient inflation, the message sent to the market is not one of supporting growth, but panic that prospects for European growth had diminished so much, the bank had thrown caution to the wind. For a long
time to come, the market perception of the ECB is "behind the curve".
This and several other factors would serve to depress the value of the
Euro, until it becomes so unsustainable, that it could snap back violently
like a stretched rubber band. When would that happen? This is the subject
of new maps that we are investigating. |
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