bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

MONETARY POLICY IN THE EUROPEAN UNION 409
2001 might cause inflationary pressures to develop in late 2002 and 2003
that would cause the inflation rate to become unacceptably high. The
Governing Council of the ECB, therefore, chose to leave interest rates
unchanged.
In the light of the performance of the euro and the targets established for
itself by the ECB, what can we say about European monetary policy since
1999? First of all, we should note that, in the 37 months during which the
ECB has been responsible for monetary policy, the inflation rate has been
within the target range on only 16 occasions. All of these were in the early
months of operation of the ECB when, as we have suggested above, the
inflation rate was being influenced more by the separate monetary policies
in existence before 1999 than by anything done by the ECB. Indeed, inflation
was outside of its target range for 20 consecutive months from June
2000 to January 2002. Despite this, we are not in a position to suggest that
ECB policy has failed since, as we have indicated above, its approach to
policy is sufficiently opaque to leave us uncertain regarding the precise
intentions. Inflation has certainly not run out of control and shows no sign
of doing so. Indeed, the forecast for 2002 shown in Table 13.4 suggests that
the average annual inflation rate for the euro area in 2002 will be only 1.5
per cent, well within the target range.
Part of the problem stems from the dubious role of the monetary growth
reference value. In December 2001, the ECB reaffirmed the monetary
growth reference value as 4.5 per cent, but we have noted a tendency to
attribute growth rates above this level to temporary and irrelevant factors.
It should be clear from other sections of the book that we have no problem
with the downgrading of a monetary target. However, it seems odd that
monetary growth continues to be acknowledged as the ‘first pillar’ of policy
when all that occurs is that ‘developments of M3 are continuously and
thoroughly analysed by the ECB in the broader context of other monetary
indicators and information from the second pillar to assess their implications
for the risks to price stability over the medium term.’ 11
To conclude, we need to mention two other possible concerns regarding
monetary policy in the euro area. The first concerns the unevenness of
inflationary pressures across the area. The Organization for Economic
Cooperation and Development (OECD) figures for the annual increase in
consumer prices (per cent, p.a.) in the euro area for the year 2001 were:
Austria 1.9 Germany 1.7 Netherlands 4.4
Belgium 2.9 Ireland 4.2 Portugal 3.7
Belgium 2.9 Italy 2.4 Spain 2.7
France 1.4 Luxembourg 1.7