Resumen de Assessment of the ECB Monetary Strategy Review, 2021: Does the New Strategy of the ECB Secure the Purchasing Power of the Euro over the Long Term?

John Greenwood

• The European Central Bank (ECB)’s Monetary Policy Strategy Review (MPSR) conducted in 2020–2021 provides little certainty as to whether the next few years will be more inflationary than the past decade, when the Eurozone persistently undershot its inflation target. Since the outcome of the MPSR will depend on the average growth rate of M3, the question is whether the MPSR provided any clarity on this issue. Following directly from a similar review conducted by the US Federal Reserve in 2019–2020, we find that exercise was unhelpful in determining a path for the amount of money in the United States or the Eurozone. Moreover, international trends in monetary policy away from ‘economic and monetary analysis’ – the Bundesbank-based founding principles of the ECB – towards interest rate management or adjusting policy to ‘financial conditions’ are unhelpful for achieving any target for broad money (M3 in the Eurozone). The original ‘reference value’ for M3 is shown to have been too low, but the ECB’s new reliance on interest rates and ‘financial conditions’ alone without retaining a quantitative anchor as part of its dashboard is risky. The revised framework of a symmetric inflation target widens the ECB’s discretion while retaining its new policy tools without committing to any core principles, resulting in a high degree of uncertainty about future M3 growth and inflation.