During the few years preceding the crisis, the ECB has been accused of applying a rigorous, rigid for the sole purpose of maintaining a stable price level without worrying about the imperatives social benefits of strong economic growth. The debate has raged between two legions: those who argued that price rigidity was the best policy Monetary economically possible and those who defended the view that a more lenient credit policy with lower interest rates, this price inflation slightly higher, would have positive economic effects. Proponents of this second opinion has continued to rehash the American example, the central bank kept rates lower than those of the ECB, which had higher growth. According to them, with rates somewhat lower and a little more inflation, the European machine would cease to be clamped and could finally prevail in globalization.
The so-called rigidity of the European Central Bank has taken root in the media discourse in three ways:
- Inflation has remained low since the establishment of the ECB, which would imply any "logical" a very strong political discipline within the central bank
- A speech rigor constantly rehashed by the ECB executives, especially Mr Trichet seemed not to have that price stability
- The Articles ECB does give the European central bank that the price stability objective
- Finally, the relative rigidity of interest rates, many less reactive to the "cycles" economic Fed.
First, it should be noted that the rates by the ECB as decried by the business press and many authors have been in the years preceding the crisis at historically low levels between 2 and 4%. For the European central bank, interest rates are the primary means of monetary control since it was through them that it regulates the demand for loanable funds from the central bank from private banks.
Then, beyond the index Official prices, look what has really been the policy of the ECB during the last 5 years. The ECB has a direct control on bank reserves and notes in circulation. The rest goes on within the banks through the "multiplier bank (credits are deposits).
Growth - Banknotes and coins in circulation
2003: 22.1%
2004: 16.8%
2005: 12.3%
2006: 10.1%
2007: 8,
1% 2008: 13.5%
Growth in 6 years: 116%
growth of bank reserves:
2003: 5.32%
2004: 7.74%
2005: 12.46%
2006: 12.17%
2007: 11.26
% 2008: 4.71%
growth in 6 years: 66%
We already see that we are very far from the strict policy as we described. The ECB has had a policy totally lax. It has increased the monetary base (reserve tickets + + pieces) in an absolutely huge.
look at the effects on the currency truly outstanding during the last 6 years we have carried out the current crisis.
Growth of broad money supply M3
2003: 4.6%
2004: 5.8%
2005: 11.3%
2006: 13.8%
2007: 12.3%
2008: 6.9%
growth over 6 years: 68% (note the promiscuity with reserve growth)
lax policy the ECB has been a result of extremely rapid growth means payment. It must be remembered that these years have seen a growth of 2 to 3% per year. Thus the quantity theory of money says that if you target an inflation rate of 2% would require a growth in money supply by about 5% (Inflation: 2% + 3% growth = M3 growth: 5% ). Now they are growing more important in M3 we saw in 2005, 2006 and 2007. La banque centrale au lieu de ralentir ce mouvement en restreignant la monnaie de base a continué à émettre des montants très important de monnaie de base.
The question that arises is: why all this new money injected did not cause an inflation of consumer prices. Depending on the quantity theory of money, a fall in the rate of movement of means of payment could explain this. Yet it had no particular reason to fall so heavily to compensate for inflation should be around 10% in 2006, for example. A second possibility is that this money could have been used and circulated largely for other purposes as the purchase of consumer goods.
This second hypothesis is largely confirmed by the huge asset bubble that we lived during the same period. Prices have soared in the real estate sectors, stocks, commodities and the number of transactions has simply exploded in the same markets. Now the asset market follows exactly the same quantitative law that the market for consumer goods. The more money available and it is moving faster, prices will rise.
The newly issued money has probably moved in a sort of parallel financial system where it was used largely to speculate on the asset market. If there had not been this great monetary expansion initiated by the ECB, it was almost impossible to see oil prices multiplied by seven, those shares doubled in recent years and property prices become absolutely unaffordable for many of Europe. The credit has cast afloat in the financial markets spurred even the ECB to disconnect the prices of assets of any economic reality. For almost a year, is the explosion of this same spirit that we exploded in the face and hurt so many economies.
The ECB was in a very difficult position. Growth the years 2003-2007, although we now appear to be quite respectable, was seen as an economic failure in France, Germany, Italy and many other countries in the Eurozone. Higher rates to calm the speculative bubble would have been, despite the central bank independence, politically untenable. Inside the mind of our policies, there would have been "inflation is low, so why constrain further growth." Yet there was inflation, very high inflation in asset prices, perhaps inflation worst kind when it is uncontrolled.
History certainly forget this media frenzy, this strange moment in economic history when facing a central bank pursuing a policy strongly expansionary economic and political figures have continued to ask him to be even more irrational.
