Fundamental Analysis – ECB’s Governing Council Meetings

The European Central Bank (ECB) is one of the most influential banks in the world. After the Federal Reserve in the United States, the ECB, together with Bank of England, Bank of Japan, Reserve Bank of Australia and Reserve Bank of New Zealand are shaping the monetary policies in their jurisdictions in a coordinated fashion. Bank for International Settlements (BIS) based in Basel, Switzerland, is having the role of the “mother of all central banks”. It helps implement regional strategies and supervise the monetary policy implementation. The ECB is an independent structure, not answering to any political party or form and it is ruling over the Euro, the common currency. The Eurozone is the area where the currency is the Euro and the Eurozone economies are the ones that make the object of the ECB policies. The Euro as a common currency is the pillar of the single market, a five-hundred million people market. The idea behind the European Union and the Euro was to create a unity among European nations and to avoid divisions. Such a project is supposed to directly compete with the United States, China, and Russia on the global stage. Europe realized that globalization is a reality and European countries will have a better chance to compete globally if they stand together. The European project is unique in many ways, and, if we’re looking throughout history, it is doomed to fail. Yet, it is not, and despite great adversities (Greece crises, Brexit, debt crises, etc.), it moves forward. Since its beginnings, it was an ambitious project. Only if you think of the Euro, as the common currency, there are some flaws to consider.

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ECB’s Tasks

The common currency, the Euro, is used in countries with different economies. Germany is Europe’s engine, but the same currency is used in Greece as well. Different economies require different treatment from the ECB. This makes the central bank’s role extremely difficult. National banks are still in place and they play an important role with the ECB. They are acting like the man on the field, gathering statistics and information locally, so that the ECB may take the appropriate decision at their next meeting.

The Governing Council

ECB’s Governing Council consists of twenty-five members. There is one President (Mario Draghi these days, but his mandate will expire in 2018) that has a maximum eight years (two four-year mandates possible) mandate, one vice-president (Vitor Constancio) and four members of the Executive Board. These four members are representing the most influential countries in the Eurozone, France, and Germany. It is being said that the European Union has been built on two pillars, France and Germany, as the two economies are the biggest of them all in Europe. The other nineteen members are the governors of the national banks that make the Eurozone area. They are gathering every six weeks to set the monetary policy for the Eurozone as a whole. Since 2015, minutes of their meeting are made public. Before this date, discussions were not publicly available and this raised questions in many financial circles.
ECB Governing Council -1

Explaining a Meeting

Every six weeks, the monetary policy in the Eurozone is shaped by the Governing Council’s decisions. This may be an increase or decrease of the rate corridor, is simply adding new tools to the monetary policy already in place. A central bank’s role is to stimulate growth, and, as part of capitalistic economies, inflation should be present. That is a certain level of inflation, not any kind of it. The ECB’s mandate is to keep inflation below or close to two percent. Doing that is not an easy task, especially when inflation is far away from the target. Throughout history, there are plenty of examples of high inflation periods in the world and how central banks dealt with it. The most famous case people almost forgot about is when the Federal Reserve of the United States raised rates to 20% to curb a high inflationary environment. It was under the Volcker’s rule that the Fed did that, but this is the classical medicine: when inflation overshoots, rates are hiked. A much bigger problem appears when inflation is falling and threatens to break the zero level. What is to be done in such a situation? Deflation appears when inflation goes negative and it is more difficult to fight it. When inflation falls, central banks are cutting rates. It seemed that below the zero level is a no-go for most central banks, but the last few years show the contrary. In many parts of the world, rates are in negative territory and the central banks are forced to apply monetary instruments and policies that are considered unconventional. In short, they’re trying to create inflation by all means. Now, this is a dangerous game that could backfire in a blink of an eye. While central banks are saying that things are in control and it is the only way to return to sustained growth, there is no evidence of that as there is no precedent to such measures. This is the road the ECB is walking and we’re all set to find out soon if the path is the right one. The Governing Council is trying to be as objective as possible and for that, the voting is made via rotation. The six members of the Executive Board always cast a vote, while out of the other nineteen members of the Governing Council, only fifteen are voting at a meeting. Any decisions the Governing Council is taking should be the result of a consensus. The split of votes, though, is not publicly revealed. However, when an important decision is taken, the press conference that follows will always see press representatives asking if the decision was unanimous, if not, why dissented, etc. It is at the President’s will if those questions will be answered. To give you an example, you should look at the Germany’s opposition to the current bond buying program the ECB is running. Germany didn’t agree with it as German savers are still worried about the value of their currency. After losing all its value between the first and second World War, the German Mark left unhealed wounds for the German people. Bond buying under a quantitative easing scheme is supposed to bring inflation, and this is why Germany opposed. At the press conference that followed the decision, the President was asked if it was taken unanimously, and the answer was obvious. Nevertheless, there were enough votes to move forward with the program and here we are, years later, watching the ECB preparing the exit. Was the program a successful one? Judging by inflation levels, it could be said that. The HICP inflation, or the harmonized one, is close to the ECB target. The Governing Council did the job that was supposed to do and is ready for the next task. No matter the shape of the economy, every six weeks this ruling body is meeting to assess it and to apply for the right medicine.

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