Seven years on: Assessing Europe's central bank

• Pages: 314-315

Page 314

After five years of almost no growth, the euro area is finally enjoying an economic recovery. But the European Central Bank (ECB), which sets interest rates for the euro area's 12 member states and whose policies are shadowed by many other European Union (EU) countries outside of the monetary union, is worried about inflationary pressures. It has embarked on a tightening of monetary policy, which has led some policymakers to complain that it risks choking off the recovery. Camilla Andersen spoke to Peter Kenen, Senior Fellow at the Council of Foreign Relations, about the role of the ECB.

IMF Survey: Has the euro been successful?

Kenen: The euro is the second most important currency in the world today. For a young institution to have achieved that is a major accomplishment. There is also evidence that the euro has stimulated trade, although on a more modest scale than some of my colleagues, for instance Andrew Rose, had originally predicted.

And it has enormously stimulated the growth of European capital markets-to the extent that we are now seeing the unification of European stock markets. Even though London is still the main financial center, the consolidation of the continental securities markets has proceeded at a rapid pace.

IMF Survey: Inflation in the euro area has generally been low. But for the past few years, the ECB has not been able to completely meet its own target of keeping inflation "close to but below 2 percent." What does that say about the ECB?

Kenen: That is a difficult question to answer because inflation rates have been falling all over the world since the ECB began operating in 1999. The ECB's track record is good, but not much better than that of the other major central banks, the Bank of England and the U.S. Federal Reserve. As you probably know, its inflation target has been widely criticized. Most central banks have a single target surrounded by an acceptable band of 1 percent on either side. In contrast, the ECB does not have a range around its target. That has put the institution under unnecessary pressure. If the target had been set at 2 percent with a margin on either side, it would have been well within its target most of the time. Instead, it has missed its own target over and over again.

IMF Survey: Is the target too ambitious?

Kenen: The target may be somewhat low, particularly since we don't know how much below 2 percent the ECB wants the inflation rate...