"The policy framework governing the euro can be aligned with a more general theoretical framework, which finds its expression in the ‘new consensus macroeconomics’ (NCM). The essential features of that theoretical framework are as follows:
(i) politicians in particular, and the democratic process in general, cannot be trusted with economic policy formulation with a tendency to make decisions, which have stimulating short-term effects (reducing unemployment); but which are detrimental in the longer term (notably a rise in inflation). In contrast, experts in the form of central bankers are not subject to political pressures to court short-term popularity, and can take a longer-term perspective, where it is assumed that there is a conflict between the short term and the long term. Policy makers’ scope for using discretion should be curtailed and the possibility of negative spillovers from irresponsible fiscal policy must be reduced.
(ii) There is only one objective of economic policy and this is price stability. This objective can only be achieved through monetary policy, and through manipulating the rate of interest in particular.
(iii) inflation is a monetary phenomenon and can be controlled through monetary policy. The central bank sets the key policy interest rate to influence monetary conditions, which in turn through their short-run effects on aggregate demand affect the future rate of inflation. Central banks have no discernible effects on the level or growth rate of output in the long run, which is determined exclusively by aggregate supply factors like technology, capital, and labour inputs. However, central banks do determine the rate of inflation in the long run.
(iv) the level of unemployment fluctuates around a supply-side determined equilibrium rate of unemployment, generally labelled the NAIRU (non-accelerating inflation rate of unemployment). The level of the NAIRU may be favourably affected by a ‘flexible’ labour market, but is unaffected by the level of aggregate demand or by productive capacity.
(v) fiscal policy is impotent in terms of its impact on real variables (essentially because of beliefs in the Ricardian Equivalence theorem, and ‘crowding out’ arguments), and it should be subordinate to monetary policy in controlling inflation. There is allowance for the operation of ‘automatic stabilisers’ as the actual budget surplus or deficit will fluctuate during the course of the business cycle with tax revenues rising in boom and falling in recession, and this provides some dampening of the cycle. The budget should though be set to average balance over the course of the business cycle."The structure of the ECB clearly conforms to all five points. The sole objective of the ECB is price stability, and decisions are made by a governing body composed of bankers and financial experts. There are, and can be, no involvement by any other interest groups or any democratic body. The only EU level policy from controlling inflation is monetary (interest rate) policy, which presumes that monetary policy is a relevant and effective instrument for the control of inflation. Inflation is in effect targeted by the ECB in the form of pursuit of ‘price stability’ interpreted as inflation between 0 and 2 per cent per annum. The third point is fully accepted and adopted by the ECB. This can clearly be confirmed by the monthly statements of the Governor of the ECB at his press conferences after the announcement of the decisions on the level of the rate of interest.
"The implementation of what is in effect a balanced budget requirement at the national level under the Stability and Growth Pact and the absence of fiscal policy at the euro area level has eliminated the use of fiscal policy as an effective instrument for the reduction of unemployment (or indeed of containing inflation pressures)."