ECB doesn’t have superheroes!

Spare a thought for the European Central Bank (ECB).
The minutes of the last Governing Council show the central bank is in a bind over the state of the euro zone recovery and the next steps to take.
Still, it is hard to see why they shouldn’t be. The economic picture is objectively confusing. The problem is that we have come to rely so much on guidance from central bankers, that we are unable to accept when they are not in the position to anticipate very much.
Europe’s central bankers know they are presiding over a slowing economy. Growth cooled to 0.2 percent over the last two quarters of last year, down from 0.4 percent in the first two. The deceleration is starting to affect inflation expectations, which are crucial to ensuring that the ECB can meet its target. Financial conditions, while still favourable, have tightened compared to last year.
The question is just how serious this decline will be and what to do about it. The ECB is considering launching a new round of cheap loans to the banks, which would help to unclog monetary transmission mechanism particularly in parts of currency union where the economy is weakest.
While growth is coming down everywhere in the euro zone, some countries – Germany and, above all, Italy – are in worse shape than others. Global trade tensions are proving a serious drag on exports – but it is not clear whether they will be resolved.
Central bankers are grappling with two forces. The first is their decision since the financial crisis to be much more open about the direction of policy. Forward guidance can offer extra accommodation when rates are already stuck near zero by encouraging companies and consumers to borrow in the knowledge that monetary policy will not be tightened for a while. But this can generate an expectation that officials will always tell you what they will do next. When such decision is uncertain, or hinging on confusing data, the credibility of a central bank is bound to suffer more than it would have in the past.
The second is the outsized role monetary authorities have played in last decade, particularly in the euro zone. Politicians, not central bankers, have responsibility for solving the problems affecting the currency union at the moment. Italy’s recession has a strong self-inflicted element to it: smarter tax and spending decisions in Rome and fewer policies that undermine the country’s competitiveness would go a long way to reducing the risk of a credit crunch.
The ECB has some explaining to do over its recent decisions. The choice to announce the termination of its net asset purchases is beginning to look questionable. But, by the same token, it is wise to give policy makers a bit more time before they announce their next big decision.
—Bloomberg

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times