Insight
Europe’s central bankers should cherish their disagreements by Sander Tordoir and Shahin Vallée, 20 December 2022 Promoting an open debate instead of forging consensus behind closed doors could make the European Central Bank’s decision-making culture more effective. That is why the ECB should follow the Federal Reserve’s example and publish a ‘dot plot’ with its decision-makers’ views. The European Central Bank (ECB) must chart its monetary policy through very murky waters. Whereas the inflation problem in the United States is largely driven by an overheated economy, the picture in the eurozone is much more challenging. The pandemic reopening has led to rapidly rotating demand for goods and services, and disruptions have limited supply chains while the Russian war on Ukraine has created an acute energy crisis, causing inflation to surge in the eurozone. But the growth of demand and wages is weaker than in the US, and Europe is facing a recession as consumers tighten their belts in response to high energy bills. These factors could stamp out inflation more quickly than expected. Given these cross-currents, there is a real danger of a monetary policy mistake, in which the ECB either raises interest rates too high, too fast, causing a deeper recession than needed, or acts too timidly, and lets inflation gallop away. Instead of secretive and consensual decision-making, more robust and open debates would help to prevent groupthink and clarify the tricky trade-offs the ECB faces. Since 2012, members of the US Federal Reserve’s policy-setting body – the Federal Open Market Committee (FOMC) – have each produced their own macroeconomic forecast and their preferred path of interest rates. The publication of this anonymised summary of economic projections, captured in a chart known as the ‘dot plot’, has led members of the FOMC to develop their own views and be prepared to own and defend them. When the dot plot shows that most FOMC members think rates will be higher next year, market participants can expect hawkish moves; but when members are divided, participants can expect slower rate rises, or none. While the plot is imperfect, it has allowed a greater degree of transparency within the FOMC and with the general public. The ECB has followed the opposite course. It has reluctantly agreed to publish accounts, rather than detailed minutes, of its Governing Council meetings. And these are so heavily edited that any divergent views are largely ironed out. This insistence on projecting unity and consensus hurts the policy process by suppressing dissenting voices. CER INSIGHT: Europe’s central bankers should cherish their disagreements 20 December 2022
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