Draghi’s dilemma

Europe remains in the midst of a deep financial crisis. It is an economic crisis, a banking crisis and a debt crisis. This trinity of factors makes it not only difficult for Europe to recover, but tedious, too. The European Central Bank (ECB) is operating in a difficult context - and finds itself faced with a dilemma. The institution has already missed one of its main targets, price stability, by a long shot. At the same time, its expansionary monetary policy is also having negative side effects. The big question now for the bank: How will it resolve this dilemma?

The ECB has a clear mandate: It must ensure price stability in the eurozone, which the bank has defined as an inflation rate of just below 2 percent in the medium term. It is a rate which most central banks in developed economies agree on. A lower rate is generally not desirable, as it almost always drags other sectors of the economy into deflationary pricing, requiring the ECB to counter that through its monetary policy.

On the other hand, current policy also produces many side effects, which are also viewed negatively. Low interest rates often pose a challenge to many financial institutions, as guaranteed rates mean that they are no longer operating in line with their business model. Even regular German savers are hit hard by the zero percent rates, as money in their savings account accrues such little interest. At the same time though, we must not underestimate the risk of bubbles in financial markets.

What should the ECB do?

What weight should the ECB give to both price stability and the side effects of its monetary policy in deciding the way forward? Many in Germany would like the ECB to give more weight to the consequences of its policy, especially as it can only be successful if limited. Legally speaking however, the ECB is obliged to strictly follow its mandate and implement measures set out by the EU Treaties, to achieve its aim of price stability.

Germany urgently needs an open, balanced and informed debate regarding the ECB's monetary policy. No one can deny that risks exist, and that they are having negative side effects. Nor should we deny that the ECB is an independent institution with a clearly defined, meaningful task of insuring price stability. To require the ECB, even temporarily, to turn its back on its mandate would lead to the politicization of the bank, which in turn would endanger its independence. Independence and credibility after all, are the two main strengths any important central bank has to display. These strengths must protect the bank.

In addition, Germany must also remember that Europe still finds itself in times of crisis, and the ECB's monetary policy was devised for the whole of Europe, not just Germany. If Germany were to have its own currency, there would certainly be no zero percent interest rates and also no bond purchasing by the central bank. But then Europe would also find itself plunged into an even deeper crisis, with a far stronger German currency, and weaker German economy.

Marcel Fratzcher is Director of the German Institute for Economic Research (DIW) and Professor of Macroeconomics at The Humboldt University in Berlin.