What Is the European Central Bank Supposed to Do?

Table of Contents

1. Introduction

2. Creating a Backward-Looking Assessment

   1. What Is the ECB Supposed to Do?

      1. Mandate

   2. What Truly Is the Central Bank of the Eurosystem in Place to Do?

   3. What Is the Balance Between Rules and Discretion, to Return to the Debate Popularized by Fischer (1990), Envisioned for ...

   4. If Additional Responsibilities Are Desired, Why Are These Not Written Into the Statutes Governing the Bank?

   5. If Additional Responsibilities Are Envisioned and Are Not Deemed Appropriate at the Treaty Level (Due to a Perceived Ne ...

   6. Are the Goals of the ECB and Is Its Mandate Immutable or Are They Allowed Shifting Over Time?

      1. Institutional Position/Positioning

3. How Has the ECB Performed in the Past?

4. Planning for the Future

   1. Continuing Demographic Decline

   2. Climate Change

   3. Technological Innovation

5. Conclusions and Policy Recommendations

6. References

Central Banking: Current Challenges and Future Perspectives

1. Central Banking in Perilous Times: An Open-Ended Chronicle, by Yuri Biondi, https://doi.org/10.1515/ael-2023-0007.

2. The Future of Central Banking, by Hiromi Yamaoka, https://doi.org/10.1515/ael-2019-0003.

3. Independence of Central Banks: The Need for an Urgent Revamp!, by Philippe Moutot, https://doi.org/10.1515/ael-2019-0070.

4. Two Major Economic Crises in the Early Twenty-First Century and their Impact on Central Bank Independence, by Marek Dabrowski, https://doi.org/10.1515/ael-2020-0139.

5. What Is the European Central Bank Supposed to Do?, by Christopher Andrew Hartwell, https://doi.org/10.1515/ael-2020-0035.

6. Central Banks of the Visegrad Group States in the Light of Constitutional Regulations, by Martyna Wilmanowicz-Słupczewska, Maciej Serowaniec and Jacek Wantoch-Rekowski, https://doi.org/10.1515/ael-2019-0078.

7. Book Commentary on “Financial Citizenship: Experts, Publics, and the Politics of Central Banking” by Anne-Lise Riles, by Clement Fontan, https://doi.org/10.1515/ael-2019-0017.

1 Introduction

In July 2021, in the middle of the coronavirus pandemic and over 18 years since its last undertaking of this kind, the European Central Bank’s (ECB) published a new monetary policy strategy. By any stretch of the imagination, such a reappraisal was overdue, as the world that the ECB faced was a much different one than the one it confronted in 2003. Indeed, since the last official stock-taking of the ECB’s work – done a mere four years after the introduction of the euro – the world had gone through an asset price bubble, a global financial crisis, a sovereign debt crisis localized on the euro area, enormous injections of liquidity by nearly all central banks, the rise of populism, additional members joining the euro, the emergence of blockchain and crypto-currencies, continuing and persistent anaemic growth in much of the euro area, a global pandemic and lockdowns, and the looming threat of another global recession. Just the massive response to the global financial crisis alone, comprising all manner of unconventional monetary policies and asset buying programs (Hartwell, 2019a), represented an enormous expansion of the ECB’s mandate and its powers unlike anything contemplated at the turn of the 21st century.

Given the long time, both temporally and spatially, between reviews, it is urgent that economists, policymakers, and the ECB itself continues a stock-taking exercise of its monetary policies within a much broader framework than “policy instruments” in order to inform the right sort of policymaking going forward in the post-global financial crisis, post-coronavirus crisis, and current back-to-the-1970s world. A review such as this should not be taken lightly and is a rare opportunity to rethink the entire monetary structure within which the ECB resides. In other words, the ECB should have welcomed not just the policy review mechanisms which it is comfortable with, but an institutional one. In this sense, the 2021 review fell far short of where it should have gone and even it has been surpassed by events; written to address a low inflation world, the review ignored the complex and chaotic effects which its own policies and its institutional situation created in Europe in the 2000s and 2010s. An institutional review would thus go beyond the mere tools of policy (inflation targeting, financial stability, asset buybacks, etc.) and examine the situation of the ECB as an institution amongst many and its performance as an institution in the past and into the future.

This institutional assessment is necessary in addition because the ad hoc nature of ECB policy over the past decade, especially with relation to the global financial crisis and the use of unconventional monetary policy up to an including the coronavirus pandemic, has been matched by ad hoc assessments of various ECB programs (see inter alia Altavilla et al. (2016) or Fratzscher (2016)), considering programs or success metrics in isolation from the overall mandate of the bank or from its position in the institutional web of the EU and Member States. This piecemeal approach obscures the reality of what the ECB is, that is, an institution charged with a narrow mandate as well as influenced by the complex web of political institutions in which it operates (Hartwell, 2018). Thus, a comprehensive assessment must be undertaken to create a holistic picture of where the ECB is fulfilling its mandate, where it has gone off script (or even what the script is!), and what it should be doing as a unique institution standing astride the monetary policy of nowadays 27 disparate nations. Such an assessment would have to ask hard questions, including looking at the ECB’s own internal structure, tools, external constraints, relations with Member States, and ultimate objectives. Importantly, given the (now) long track record of the ECB (especially as compared to its record in 2003 and even from 2021), there should be a rigorous and quantitative assessment of the ECB’s performance vis a vis key economic metrics beyond the narrowest of monetary aggregates or liquidity measures. Has the ECB achieved what it set out to do in an institutional sense? What exactly is it supposed to do? What tools worked best and which were not effective? And can we define “success” for a supra-national central bank?

In addition to a review of the past 20 years of ECB operations, any institutional review would also necessarily have a forward-looking component also focused on the ECB’s tools and mandates: what are the pros and cons of the current inflation targeting regime for the future (in light of the past)? Part of this was addressed in the 2021 review but, as mentioned, focused on a world which does not exist anymore, that is, the weak growth but no inflation world of the 2010s. Should the ECB’s mandate be expanded to include additional issues (e.g. climate change)? This was also suggested in the run-up to the 2021 review but again as a technical, rather than constitutional, question. Yes, the ECB can deal with climate change but should it as an institution? And does the ECB’s dual mandate of financial stability and price stability make sense for future financial challenges? Do we need a fundamental rethink of the model of central banking which the ECB has relied on through various crises, given that its organization and composition makes it “a central bank like no other” (Kirkegaard, 2011)? This forward-looking review would necessarily be less precise, but this forecast uncertainty should be built into the methodology; that is, the uncertainty of any challenges occurring, judged by their probability ex-ante, should inform the design of policy going forward (in recognising the complexity of economic systems in general).

This article is meant to suggest the structure of such a review in a manner which may be more effective in helping policymakers going forward with their overall conception of the proper role of monetary policy within an institutional web. This takes us beyond the “central bank independence” (CBI) debate, which, as noted previously (Hartwell, 2018), is an institutional argument without actually using institutional analysis; in fact, it is a call for bringing institutional analysis more explicitly into understanding central bank operations, such as with the ECB. In particular, I highlight the details of the two facets of the review just mentioned, fleshing out how both an ex-post and an ex-ante assessment should be conducted and what the scope of these assessments should be. Importantly, I also delve into the most important policy question of the past two decades, namely the ECB’s prolonged use of unconventional monetary policy, and how this might factor into such an institutional review. Finally, we conclude with some policy recommendations which follow from the design of the review, touching on the institutional arrangement of the ECB and what actually is the proper role of a central bank in a modern economy.

2 Creating a Backward-Looking Assessment

Given the substantial change of circumstances, both internal to the ECB and external in the form of the euro-zone and global economies, a review of ECB monetary policies was long overdue. However, as mentioned in the introduction, it fell short and required a more comprehensive institutional review. Such a review would be comprised of two parts, with the most obvious portion being the backward-looking assessment. The purpose of this section is to describe what such an assessment would look like and, crucially, what topics need to be covered. The ascending order of the review should be from mandate to institutional placement, with the capping portion of the review an economic evaluation of how well the ECB has performed its existing mandate, with its existing tools, thus far.

3 How Has the ECB Performed in the Past?

Perhaps the most rigorous part of the backward-looking portion of the review, taking into account the mandate, placement of the ECB in the European economic and political system, and the tools it uses, is to measure the ECB’s past performance against a clearly defined metric of success. Have the tools that it was already granted been effective against a host of success metrics? And what actually is “success” for the ECB? This last question is most important, moving beyond the policy question, and focusing on the institutional raison d’être for the bank.

In many ways, the first question has already been tackled by researchers globally, It is a well-known tenet of public administration that measuring government programs or bureaus is difficult because they operate on outputs rather than outcomes (Hatry, 1978): however, for an organisation such as a central bank, there are quantifiable outcomes which occur as a direct result of bank actions, and thus it is easier to plot central bank actions against these outcomes than, for example, a Ministry of Health’s programs versus disease incidence. Given that central banks such as the ECB are explicitly crunching numbers and observing the economy via a series of macroeconomic and financial analyses to inform monetary policy, it should be far easier to contrast policy versus actual conditions.

One area which should definitely be scrutinized within the ECB and arrayed against the definition of “success” is the unconventional monetary policy that the ECB has been pursuing since the global financial crisis and which has only recently abated in the face of inflation unlike that seen since the 1970s.^[5] Understanding the effect of unconventional monetary policy is crucial because, even throughout the pandemic-triggered global recession (exacerbated by government lockdown policies), the ECB had been using its monetary policies to their maximum. Over at least 13 years, the ECB tried to simultaneously control both main levers of monetary policy over the past decade, specifically, interest rates and money aggregates. To be more explicit, central banks have long faced the constraint of targeting monetary aggregates (and then letting interest rates adjust as they may due to monetary supplies) or, as done more recently, setting interest rates and dealing with the monetary supply consequences. Indeed, interest rates have been the preferred method of policy control between the 1990s and the 2000s (Biondi, 2018b), as money growth was an admittedly noisy and chaotic (Solomon & Solomon, 1991) tool (although Benhabib et al. (2002) showed that interest rate targeting could also be chaotic). However, the scale of the global financial crisis, and the charge towards “whatever it takes,” led central banks – paramount among them the ECB – to believe that they were able to control both levers simultaneously, using their “normal” interest rate levers and supplementing this with monetary growth levers such as asset purchases or interventions in corporate bond markets.

This can be seen in the actions of both the US Federal Reserve and the ECB, as the plummeting of interest rates to zero or lower was accompanied by quantitative easing, asset buy-backs, and other direct injections of liquidity; while it may appear that money growth is no longer part of any monetary policy in the developed world, such a view ignores the explicit goal of ECB (and Fed) policy over the past 10 years (and of Japan for the past 20 years at least). Massive injections of liquidity have targeted money supplies, meaning that central banks have tried to have the best of both worlds and use both a “targeted” interest rate tool and blunt monetary injection. Moreover, this approach differs from the old school version of monetary targeting by not having an explicit monetary aggregates target, instead targeting asset classes such as corporate bonds and done on an asset-by-asset basis. This targeting of assets thus masquerades as part of the broader unconventional monetary approach, tied to the pressing economic objective of preventing a precipitous decline and/or ensuring liquidity, but in reality is a less constrained new take on an old policy tool. By masquerading as such, its use remains unmoored and potentially hazardous.^[6]

Of course, this attempt was accompanied with a lack of understanding of the effects of central banking in economy and society. It was enabled by swathes of the academic community and its reliance on a-theoretical models such as vector auto-regressions or co-integration, which merely modelled equilibrium relationships as if they would hold forever and ever (with the warning of Lucas (1976) not heeded), not seeking to understand the underlying economic incentives or interactions. Getting into the weeds of the statistical properties of the data but without understanding the economics of human action led to papers in respectable journals such as Carstensen (2006), using new techniques to tease out policy recommendations which were wholly worthless from a policy standpoint: Carstensen’s (2006) entire last paragraph says that perhaps excess liquidity was too high in the euro area, or perhaps it was not, depending upon where one arbitrarily set the reference point.^[7] With such wide margins of confidence emanating from academic circles, it was little wonder that central banks joined in to believe that they could really have it all. That is, there existed ways in which they could simultaneously abnegate the time value of money – by setting interest rates near or below zero – while also inflating money stocks by infusing cash into bond markets but without having it translate into price inflation (or, if it did, such as in asset markets, it was actually a gain for holders of various asset classes). Research such as Belongia and Ireland (2018) supported this, promising that central banks could both enact interest rate decreases and monetary targeting, especially once the zero lower bound had been reached. And of course, the entire premise of “modern monetary theory” (MMT) as espoused by Kelton (2020), is that the economy is never at its full potential and thus inflation is always a net positive.^[8]

However, what these analyses overlooked was precisely what Lucas (1976) predicted, in that the fundamental relationships among variables would change due to reactions to policy (a reality which was explicitly eschewed in the models that econometricians were using). In particular, single-shot models of “money demand functions” ignored the cumulative effect of utilization of so many instruments, with little ability to say what a package of policies at time t might do to expectations or demand at time t + 5. More critically, these models had little predictive power if external conditions were to change dramatically, say if economic growth were to slow or other exogenous shocks – like a global pandemic – were to strike; similarly, these models had very little to say about the role of financial intermediaries and their active role in transmission of a shock. More complex models such as agent-based modelling (ABM) may be able to handle the dynamics of a financial crisis better (Bookstaber, 2017) but they thus far have also not been utilized to actually predict such a crisis (Richiardi, 2017). And even where ABM has been applied to post-crisis monetary modelling, researchers admit that “It is much more difficult to test the role of, say, monetary policy when one wants to study different behaviours of the central bank which are related to the endogenous evolution of the system” (Giri et al., 2019: 44).

Unfortunately, this eventuality is precisely what the euro area is confronting as its next recession has descended. With central bankers having run out of instruments via continuing to try and influence monetary supplies and interest rates, the only solutions which have been explored in academia and the popular press (and possibly read by the central bankers at the ECB itself) have been more and more extreme: “helicopter money” (Belke, 2018), continued asset purchases (Claeys, 2020), or a recourse to “modern monetary theory” (where fiat money can be utilized in pursuit of “justice,” see Connors and Mitchell (2017)). All of these “solutions” might have even more deleterious consequences for the real economy and cannot be expected to rescue the euro area. But the fact that they were brought forward shows just what a bind the ECB has put itself in by exhausting all possible realistic options during an expansion.

Thus, a key point of examining the ECB’s reason for existence is understanding how it has performed in the past, with paramount among these examinations the look at unconventional monetary policy and the drivers of why it came to be, how it was able to be accepted for so long, and how a supposedly non-political institution was informed by political pressures to keep it in place. For many researchers, the question of “success” has already been decided, with much of the research that has been done on the effectiveness of the post-global financial crisis approach predicated on the short-term imperatives of “saving the financial system” or restoring growth as soon as possible. For example, Neely (2015) notes that central bank communication and policies helped to keep yields low, showing that central banks still had influence even at the zero lower bound. Researchers from the Eurosystem (perhaps unsurprisingly) also found that the massive quantitative easing pursued by the ECB led to less output decline and kept inflation more sustained than would have occurred otherwise (Mouabbi & Sahuc, 2019). Ironically, as Acharya et al. (2019) note, unconventional monetary policy also did not help the financial sector, as it banks remained weakly capitalized and any lending helped firms to build cash reserves rather than invest. Any institutional review of the ECB would start from defining what “success” was – was it stopping a needed correction? Was it keeping prices high? Was it rescuing the financial sector, with restructuring to be settled later (if at all)?

As a follow-on to this point, and although it may be difficult, it is imperative that modellers and policymakers also envision a world in which the ECB did not exist. That is, what could have happened with regard to economic aggregates or success metrics in the absence of the ECB as it stands now? What would have the economic recovery looked like without unconventional monetary policy? The impossibility of establishing counterfactuals is well-known, but statistical tools developed over the past decade have made such analyses within the realm of the possible. Simulations which are informed by reality but go beyond empirical evidence are a way to attempt to capture such effects. Unfortunately, movement in this area is at a nascent stage (see Biondi and Righi (2016) and Biondi and Zhou (2019)) but may also point the way to understanding the counterfactuals of monetary policy across a number of interconnected institutions.

Perhaps more developed are empirical exercises such as the synthetic control method (SCM) of Abadie et al. (2010), which allows for the modelling of counterfactuals based on a synthetic simulation using existing countries with similar characteristics and then projecting forward after a shock. SCM has already been utilised in the euro area in a number of studies, including Koehler and König (2015) on the stability and growth pact, Gomis-Porqueras and Puzzello (2015) on incomes with and without the euro, Zúdel and Melioris (2016) on Slovakia’s economy after the euro, Hope (2016) on current account balances in the euro area, and Verstegen et al. (2017) on overall benefits to countries of being in the euro area. I believe that SCM can be utilised in a much more systematic manner as part of the review for the entire euro area (or for individual countries) against the broad panoply of economic success metrics noted above as well, showing what could have occurred if certain ECB policies had not been followed. In this manner, the SCM analysis will form a mirror image of the event studies, providing a rough sketch of the road not taken. Such an empirical exercise will also help to inform where the ECB should, if at all, array its resources in the future.

4 Planning for the Future

Finally, if it is decided that the ECB as an institutional arrangement should be preserved and that the mistakes of the past (arrayed against a plausible definition of “success”) can be rectified, one needs to look ahead to the possible challenges of the future. The global landscape has become almost unrecognisable since 2003 and, given the lack of an institutional lens in the 2021 review, also from the vantage point of just a few years ago. Looking back to the 2003 review, the euro area itself is not just a grouping of original members of the European Union (save a few exceptions), it is a conglomeration of old and new, including Member States who had not yet acceded to the EU in 2003. Indeed, five of the euro area’s new members since 2003 (26 percent of the current total members) are new accession countries from Central Europe, while another two current EU Member States were also added in this timeframe (Cyprus and Malta). The sheer diversity of the new euro area, especially as compared to the original 11 members, has provided a challenge for the ECB going forward, especially if laggard (and Eurosceptic) countries such as Czechia, Poland, or Hungary ever join the common currency. To some extent this was recognized in the 2021 review, but the continued friction within the EU regarding institutional roles was overlooked in favour of a (as mentioned) narrow focus on policy instruments.

In addition to the internal makeup of the euro area, the economic and financial world that the ECB operated in changed vastly between its last two reviews. In 2003, the world was in the midst of a recovery coming after the rolling emerging market crises of the late 1990s and the dot-com bust and aftermath of the September 11th terrorist attacks in the United States. At the same time, the euro appeared to be on an inexorable climb, breaking through parity with the US dollar in 2003, while the innovation economy was starting to integrate the benefits of the internet (and minimise the exuberance which characterised the dot-com boom) and reshape both services and productivity. While political uncertainty related to terrorism and conflict continued to drag on financial markets, a boom was just around the corner. In short, the world was very different.

Fast forward to 2021, when the last monetary policy review was conducted, the world had been through the earth-shattering financial crisis of 2007–08, the euro area went through a follow-on sovereign debt crisis shortly thereafter, governments shut down economies worldwide as part of the coronavirus, and the financial sector in Europe still appeared brittle (especially compared to its US counterparts) but simultaneously dominated by too-big-to-fail firms. Within Europe, the EU itself was rocked by internal disagreements on migration policy and rule of law, while populism has made nationalism and sovereignty en vogue once again, derailing the dreams of ever more integration and forcing policymakers to confront the political backlash of various economic policies. Moreover, the innovation economy was more disruptive than forecasted, creating a backlash from policymakers and “old economy” stalwarts who want to have their quasi-monopolistic positions preserved. And, despite a decade of unconventional monetary policy (or likely because of it), growth in the euro area went from anaemic to facing recession. In short, the world was very different.

This recap of reality shows just how difficult it would have been to forecast the challenges facing the ECB in 2021 from the vantage point of 2003. Even capturing the main economic event of the past two decades, the global financial crisis, or the effects of the global pandemic and the clean-up of the policies surrounding it, was difficult for the vast majority of economists even on the edge of the crisis. But this reality is not just apparent from the space of time which elapsed since the 2003 review, we can easily replace “2003” with “2021” in this analysis, accounting for the last monetary policy review, which was completed during a time of low inflation but in the midst of the coronavirus pandemic. From the vantage point of 2021, the exact longer-term effects of unconventional monetary policies, the rise of populism, and government-induced recessions turning into actual recessions could not be foreseen by politicians, not to mention the prognostication that non-Eastern European specialists would have needed to see the full-scale Russian invasion of Ukraine coming (as opposed to the low-intensity conflict which had been raging since 2014). Placed against the difficulties of reality over a two-year time span, longer-term trends and technological innovation are even more difficult to predict for a monetary institution. And very difficult to predict when thinking about what a monetary institution such as the ECB should do.

This does not mean that an institutional review should shy away from such forecasts, but it does mean that the complexity of economic and structural change should force policymakers away from certainties and more towards generalities. This also means that the necessity of explicitly delineating the ECB’s mandate is paramount, to ensure that the Bank does not undergo “mission creep” in response to every possible and additional challenge. For example, a clear mandate for the ECB as an institution might help the ECB to set out its response to the following tempting policy issues which are likely to face Europe (or are already facing Europe but have not, as yet, filtered through to requiring monetary responses):

4.1 Continuing Demographic Decline

The demographic trends in most EU Member States continue to appear bleak, especially when lined up against the public expenditures and entitlements promised via welfare states in Europe. Unlike Malthus (or, for that matter, Paul McCartney) who lamented that there were “too many people,” population growth is by no means a death sentence for an economy. In fact, Kremer (1993) shows the connection between population growth and technological innovation. However, welfare states require workers to be paying into the system to generate revenue in order to redistribute, and the fewer new workers which come on-line, the smaller the pot of revenue to redistribute (Razin & Saka, 2005).^[9] The more extensive the social safety net, the more dramatic such a decline will be. This will also have knock-on effects for the financial sector, as savings and investment declines (older persons eventually dissave rather than save, even if the microeconomic evidence is not conclusive on this), and of course broader effects for the real economy as a whole.

As Figure 1 shows, the natural change of population in both the EU and the euro area (live births minus deaths) has been negative since mid-2014 and shows no sign of abating. This state of affairs means that governments and their carefully cultivated tax policies will be stretched by a reduction in revenue, leading to difficulties in maintaining high levels of public expenditure (with concurrent increased outlays on both health and pensions due to the changed age structure of society). This longer-term trend has the ability to alter financial innovation and investing strategies (creating “longevity risk,” see Kim and Choi (2011)), as well as shift risk appetites for investors (with a concomitant effect on real interest rates). However, despite attempts by Member States to avoid demographic disaster using fiscal policy (see Poland’s “500+” program), it appears that there is little that the ECB can or should do in this instance, besides monitoring how the disjoint between revenue and expenditures can affect price stability. With a clarification of the ECB’s mandate, focusing on its institutional relationship with other key institutions, such a recommendation might become apparent.

Figure 1:

Demographic decline in the EU and the euro area.

Source: Based on data from Eurostat.

5 Conclusions and Policy Recommendations

This paper has taken an expansive look at a possible institutional review of the ECB’s monetary policy strategies, focusing on the need to measure the ECB’s actual outcomes versus its mandate and its tools. In the time since this paper was first put together and its reaching a broader public in this special issue, the ECB has actually undertaken a monetary policy review but, unfortunately, it suffered from an institutional myopia, the policy equivalent of begging the question: that is, assuming to be true what is to be argued. By focusing on policies within the monetary policy realm – and, like the earlier version of this paper, coming forth in a very different world of low (and hidden) inflation – the review was too narrowly delineated and avoided hard questions on the ECB’s existence. The key takeaway from the examination in this paper is that the ECB needs to look inward for what it actually supposed is to do within the euro area. “Price stability” is admirable and even crucial, but this is a policy goal: why does the ECB exist as a unique monetary policy institution and what is its overall function in relation to other economic institutions within the European realm? Once this first principle is decided upon, the placement of the ECB as a political and monetary institution needs to be reviewed, with an eye on quantifying, in a holistic manner, just what effect the ECB’s previous monetary policy strategy has had for the euro area economy. This is not merely noting that “growth was not as bad as it could have been” or that “bond markets were kept liquid,” but the understanding of monetary policy as a complex and chaotic influence on institutional development (Hartwell, 2019b). Only by placing the results of the past 20 years against what the ECB was actually trying to achieve – and placing these results in a much larger framework of financial and economic stability – can the possible challenges to the future be tackled.

As was suggested in Section 2, one of the outcomes of this review might be a reappraisal of the ECB’s role at the centre of the euro area economy. Some of the questions which may arise – especially regarding the political effects of the ECB and its role as a political creature – are far beyond what is considered conventional wisdom in Brussels, Frankfurt, or Strasbourg, and some directly challenge the orthodoxy regarding the set-up of the ECB and its place in the euro system. However, this is precisely the point of a far-reaching review, especially one which takes place so soon after the last monetary policy review but where the world has changed demonstrably even since that review was completed. The hard questions need to be brought to bear on the functioning and position of the ECB, if only just to affirm that the original mandate is still desired. In this sense, the ECB needs to be subjected to a Nietzschean “philosophizing with a hammer,” smashing the idols before it to see which are sound and which are hollow.

And it is only by building this foundation of the ECB’s mandate that we are able to then proceed on to the challenges facing the ECB for the next two decades. As Shown in Section 4, these problems are potentially large, difficult to fathom, but, for the most part, are structural and not monetary in nature. This includes the burgenoning energy crisis in Europe related to the Russian invasion of Ukraine and especially the massive shock of the coronavirus pandemic and related containment policy, which were real productivity shocks to the economy but was in no way directly related to monetary movements – however, much of the post-coronavirus weakness in Europe can be traced to previous monetary policies. Thus, the ECB should retain flexibility in order to deal with the consequences of demographic or climate change as they relate to price fluctuations, but it is my opinion that the ECB should not attempt to interject themselves directly into solutions. Incentives are the product of institutions and, without a clear idea of what the ECB is to do as an institution, these solutions should be left to the marketplace of ideas.