A review of the European Central Bank’s strategy faces the stark reality of excessively low inflation
Crises destroy paradigms, break taboos, accelerate transformations. What once seemed unthinkable, outside the visual field, captured by the inertia and weight of the status quo, becomes suddenly possible. Imagine, pre-Covid, ordering takeout from a three-star restaurant. Or subletting a restaurant kitchen to virtual delivery startups. Or taking an academic year at Harvard online. Or training a sports team remotely via Zoom. A year later, the frontier of possibilities has greatly expanded, surely increasing potential growth.
The landscape in the eurozone after the battle against Covid is also radically different. Most of what seemed impossible a decade ago, whether due to alleged legal obstacles or obvious political interests, has come true. In 2008, when the Fed started buying bonds, it was argued strongly that the European Central Bank (ECB) could not do the same because it would incur in monetary financing against the Maastricht Treaty. Such opposition delayed asset purchases until 2015 and forced significant restrictions into the program, severely denting growth and financial stability in the euro area.
But when Covid arrived, bond purchases, with maximum flexibility, became logically the main instrument of monetary policy. Throughout the past decade, calls for the creation of a common fiscal policy financed with Eurobonds to complete the economic architecture of the eurozone, boost growth and reduce economic divergences, were met with the strong pushback that it was politically impossible, did not fit into the European legal framework, would damage the stability of the eurozone, and would generate moral hazard. Such an opposition generated a long and sterile debate with alternative financial engineering proposals, ever-more complex and far from reality, accompanied by risk-reduction and debt-restructuring schemes that perpetuated country risk and center-periphery growth spreads. But when Covid arrived, financial engineering was logically abandoned, and Eurobonds became a reality.
