As a recent BIS paper puts it succinctly: « Central banking will never be quite the same again after the global financial crisis. (…) At first glance, central banks have emerged as the great winners among policy institutions. They have been rightly hailed as saviours of the global financial system their swift and internationally coordinated action, through liquidity support and interest rate cuts, prevented the system’s implosion. And they have gained much broader powers: no one questions any longer their crucial role in financial stability, which is being hard-wired in legislation, while some are regaining the regulatory and supervisory functions lost in previous decades. And yet, beneath this glittering surface, the picture is less reassuring. The crisis has shaken the foundations of the deceptively comfortable central banking world. Pre-crisis, the quintessential task of central banks was seen as quite straightforward: keep inflation within a tight range through control of a short-term interest rate, and everything else will take care of itself. Everything was simple, tidy and cosy. Post-crisis, many certainties have gone. Price stability has proven no guarantee against major financial and macroeconomic instability. Central banks have found themselves reaching well beyond interest-rate policy, aggressively deploying their balance sheet in a variety of “unconventional” monetary policies. As a result, the line between monetary and fiscal policy has become blurred precisely at a time when public sector debts are ballooning (…). And many increasingly question the very ability of central banks to maintain inflation within acceptable ranges, notably to avoid deflation » 

Such overall assessment is particularly valid for the European Central Bank (ECB) as the monetary authority of a currency union which is not a fiscal union. In a context characterized by the absence of an integrated and even properly coordinated fiscal policies, the actions of the ECB became not only critical for avoiding the implosion of the EU financial system but also as an ersatz for compensating the unwillingness and to some extent incapacity of the National fiscal authorities to deliver a joint policy response commensurate with the gravity of the euro area crisis. The fact that the single currency has so far survived the turmoil provide however little comfort as such outcome does not mean that euro area viability conditions are guaranteed. And as a corollary, that the institutional balance established well ahead of the crisis is fit for purpose for addressing current and future challenges. The unchartered  waters in which the ECB has been navigating since the beginning of the crisis raises therefore deep economic, intellectual and institutional issues which this this blog will aim at exploring from a twofold dimension.  

The first dimension will address the stakes regarding the euro area institutional balance and democratic accountability from a triple perspective. First, since the ECB has become the supervisor of all euro area significant banks the issue of how to prevent and settle potential conflicts of interest between its monetary and supervisory missions has become an important policy debate with implications for the future design of the Economic and Monetary Union and its institutional ‘checks and balances’. Second, the current framework regarding the provision of Emergency Liquidity Assistance underpinning the lender of last resort for banks function within the Eurosystem has been highlighted as a problematic setting. Such function has been subject to an intense debate as several commentators have questioned the legality or the appropriateness of the broad discretionary powers of the ECB Council of Governors when it comes to some specific past decisions of the ECB Council of Governors regarding Irish, Cypriot and Greek banks, confirming or limiting the provision of ELA by National Central Banks (NCBs). The current institutional architecture surrounding ELA has often been justified on grounds that the provision of ELAs needs to remain within the remit of NCBs as the supervision of banks used to be National raises the question of whether the ELA regime needs a diligent revamp as supervision has been ‘Europeanised’. Beyond such issue of symmetry the stake regarding weather ELA current discretionary legal provisions are fully consistent with a balanced doctrine of operational independence remains open. Third, the highly controversial role played by the ECB in the Troika framework raises also fundamental questions on the boundaries of the ‘technical agency’ role devolved to the ECB and hence on whether such role carries unavoidable conflicts of interest.   

The second dimension will focus on the broad economic impact of monetary policy in the crisis’ and post crisis’ management context.  Much debate and even some judicial challenges have been triggered over the past years around the economic (short–term and long-term) effects of unconventional policies and in particular of quantitative easing. Under pre-crisis/normal conditions monetary policy is predicated on the assumption that its long-term macroeconomic stabilization benefits arise without leading to systematic and clear-cut distortions/implicit subsidies to the benefit of certain categories of economic agents, in other words on the assumption that price stability is systematically consistent with long-term monetary neutrality and the principle of ‘no taxation/subsidisation without representation. As subnormal conditions and the postponement of exit strategies seem to become the new normal the question arise on whether central banking and in particular the ECB will be in a position to get back to the perimeter of its conventional actions in a foreseeable horizon and more fundamentally on whether the current central banking framework and in particular its inflation target are appropriate devices to avoid blurring the lines between monetary policy and fiscal/economic policy.