The ECB should focus on growth, not just inflation!

The European Central Bank (ECB) plan to lower the official interest rate from 0.15% to 0.05% will not work. What’s the difference between 0.05% and 0.15%? Nothing. There will be no increase in requests or approvals for loans resulting from this 0.1% cut.

In July 2012, after lowering the interest rates from 1% to 0.75%, Mario Draghi explained: “We are now seeing a weakening of growth in the whole of the euro area, including countries that had not experienced it before.”

Mario Draghi, President, European Central Bank, Frankfurt is captured during the special address session at the Annual Meeting 2013 of the World Economic Forum in Davos, Switzerland, January 25, 2013. . . Copyright by World Economic Forum
Mario Draghi during the special address session at the Annual Meeting 2013 of the World Economic Forum in Davos, January 25, 2013. Copyright by World Economic Forum

And what happened after the 2012 rate cut? Nothing. Our economic situation still equates to a flat encephalogram. Why should it work this time?

The BCE vs. The Fed: United States is seeing growth, EU is not

The reality is that since the downturn of 2009, the U.S. economy has grown 2.2% annually (2010-13), which is quite good; Japan has grown 1.8%, after being considered a lost cause.

On the contrary, the European Union has seen negligible growth (0.8% per year), with the euro area even worse at 0.6%, which is virtually nothing at all. And the numbers for 2014 are even more dreary: 0% and falling. The patient is not dead, but remains convalescent and bedridden.

So what is the explanation for this? Some would cite the lack of “structural reforms,” a recent buzzword that I am not sure I even understand. In my opinion, there is a simple explanation: as in the United States and Japan, the government and the central bank have acted decisively in favor of the economy , while in Europe that is not the case.

The economy is guided by the private sphere and the public sphere. And there are only two institutions in the public sphere: the government and the central bank. If they do nothing or act too late, you’re hopeless and will be mired in recession for many years.

This patient (the EU) needs shock treatment

This is exactly what happens to a sick patient. You can let them recover on their own, with rest, simple food and whatnot; or you can give them heavy shock treatment if the situation is serious.

Without medication, the patient may recover, but will spend months confined to their bed, and even risk dying. It seems that both the European authorities and the ECB want each country’s economy to get better on its own; in their words, “correct the imbalances” (another popular expression that escapes me). It’s like the doctor giving the diagnosis but refusing to give the treatment and saying that it’s our fault we’re sick and that we must gradually get better ourselves (to boot, we paid for the visit).

Change the mission of the ECB, please 

Some will say that the mission of the ECB is solely to ensure monetary stability (inflation control) and that economic growth does not fall within its obligations, as it does for the central banks of the United States, United Kingdom and Japan. So, it’s as simple as that, ladies and gentlemen of the European Parliament: Change the mission of the ECB . Easy as pie. No more excuses. The euro area has been struggling for years and that affects millions of people. European authorities need to wake up, or quit complaining about citizens’ dissent toward the European idea.

About Eduardo Martínez Abascal

Eduardo Martínez Abascal is Professor of Financial Management at IESE. He holds a Doctorate in Economics and Business from the University of Barcelona, and an MBA from IESE, University of Navarra. He has also been a visiting scholar at the Sloan School of Management of the Massachussets Institute of Technology (MIT). Professor Martínez Abascal is the autor of the blog Economía para todos (in Spanish).

2 thoughts on “The ECB should focus on growth, not just inflation!

  1. I totally agree with the point the author makes.
    IMHO it is not really fair to compare the “United” States and the European “Union”. As the author points out, the doctor has diagnosed, does not give the medication and blames the patient for being sick. I would add and threatens to punish the patient if his/her the condition does not get better.
    some of the reasons are that the EU is anything but a union. Everything is nice when there is work and money. Hand in hand we go, being able to move and work anywhere you wish (provided you speak all of the local languages in the Union, else sweeping stairs will be your role). When difficulties appear, the old North-South, East-West thing comes up again.
    Of course there are regional sensitivities also in the US, but everybody is more concerned about what they are doing than about what the neighbor is doing. In addition, the US is not so used to have such interventionist politics as in Europe, yet when they act, they really feel it. Also, the US have much less of a drag of some labour and economic policies and practices that have become unsustainable and you cannot touch them because they are written in stone.
    In Europe politics try to regulate and intervene in everything, but when real action is needed, there is no consensus, no real action and a sense of “you are on your own, but you’d better fix it or else…”
    To make this EU invention work, we need to become more of a union. We cannot have the same currency and different monetary politics, no matter how much we thing we are standarising and regulating with the ECB.

  2. the eu needs a economic stimulase package, i think the 2009 deep is still affecting europe

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