Why does the ECB care about the euro area’s diversity?

Organised by

• Robert Schuman Centre for Advanced Studies
• EGPP: European Governance and Politics Programme

The one-size-fits-none critique of a common monetary policy for a diverse currency union has been expressed in two ways. Economists criticised that as long as business cycles are not fully synchronised, an interest rate that targets the average is bound to be pro-cyclical. Political economists criticised that the stability-oriented monetary policy of the ECB fits the Northern members of the euro area (EA) systematically better than the Southern members. In this paper, we ask how the ECB responded to this critique and what this response tells us about the political self-understanding of the independent central bank. If the ECB sees itself as an agent created for the specific task of price stabilisation, we would expect it to be narrowly concerned with the uniform transmission of its monetary policy. If the ECB sees itself as part of the EU’s political system, it should respond to such a critique and possibly suggest ways of addressing it collectively. We look at both policy responses and the communication of the ECB’s Executive Board between 2002 and 2019. Calculating Taylor rules for the EA in contrast to EA member states allows us to track how severe the misfit and the alleged bias of the ECB’s interest rate policy were, hence the potential pressure on the ECB. We find misfit, especially in crisis times, but no systematic bias. Second, we analyse the ECB’s communication about the diversity of the EA, which is vivid from the start but shows considerable variance in intensity and thrust over time.