The monetary policy of the European Central Bank (ECB) was in many ways supposed to be different than the policies pursued by national central banks. As the Financial Times noted, ‘It was not meant to be like this’.78 From the ECB’s first days in office in June 1998, the ECB’s policies were extremely politicized, its independence questioned, and its credibility doubted. What is immediately and abundantly clear is that the institutional and policy dilemmas faced by the ECB are quite similar to the dilemmas faced by other national central banks over the last 50 years. Exchange rate fluctuations, to say nothing of internal political pressure from the Euro-Zone governments, act as a direct constraint on the ability of the ECB to pursue an independent monetary policy. The early efforts of the ECB to prop up the sagging euro — which lost over 20 per cent of its value between January 1999 and January 2002 illustrated the dilemmas the bank faces. While the weak euro boosted exports from and employment within the Euro-Zone, the euro’s value demonstrated in part the power of the markets over the ECB, contributed to the credibility problems of the bank, complicated trade relationships with non-euro members and the US, and undermined public support and confidence in the euro. The first years were difficult ones for the ECB.
KeywordsExchange Rate Monetary Policy European Central Bank Price Stability Exchange Rate Policy
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