THE STATE OF THE EUROPEAN UNION. Europe at the political crossroads

MONETARY POLICY AND THE PRODUCTIVE ECONOMY IN THE EUROZONE

must specifically serve the primary objective

of maintaining price stability and it must also

take the form of one of the monetary policy

instruments expressly provided for in the

Treaties and not be contrary to the require-

ment for fiscal discipline and the principle

that there is no shared financial liability”.

Therefore, it seems clear that Eurosystem opera-

tions must meet the following requirements:

– ��

Have the objective of price stability (the ob-

jectives of Article 3 of the Treaty only in the

background).

– Take the form of one of the monetary policy

instruments (creation or destruction of mon-

ey through the purchase and sale of financial

instruments or credit operations).

From this starting point, we are interested in

specifying to what extent this purpose of the

Treaty is an obstacle, or not, to linking the activ-

ity of the Eurosystem to the productive econo-

my of the Eurozone.

Price stability as the objective of the

Eurosystem

It seems clear that, according to the text of the

Treaty of the European Union, price stability has

to be the primary objective of Eurosystem activity.

It is a good idea, then, to clarify what “price

stability policy” is from the point of view of the

Eurosystem. According to the Court of Justice of

the EU, we should consider the “struggle

against inflation” as “price stability policy”.

However, the usual interpretation of this goal by

the European Central Bank is actually quite dif-

ferent. According to the ECB, we should con-

sider “price stability policy” to be both “the

struggle against inflation” and the “struggle

against deflation”, with the objective of keep-

ing inflation “below, but close to, 2 percent”.

Irrespective of the analysis of the origin and

the consequences of this broad interpretation of

the concept of price stability by the ECB, what

we are interested in right now is highlighting

how this objective is achieved. It is clear, on the

one hand, that the basic instruments of mone-

tary policy are, ultimately:

– The base interest rates established by the

ECB.

– The creation or destruction of money by the

Eurosystem –creation or destruction that is

supposed to be aimed ultimately at increas-

ing or reducing the money supply.

As we know, both the management of base

interest rates and the creation or destruction of

money by the ECB primarily act indirectly on

money supply and, through it, on price stability.

It seems clear that the goal of the manage-

ment of base interest rates is to influence mon-

ey supply through bank lending. A reduction of

the base interest rates tends to encourage bank

lending and an increase in the base interest

rates tends to shrink credit.

The indirect nature is also evident in the cre-

ation and destruction of money by the

Eurosystem. Its direct effect is to increase or re-

duce the “monetary base”. But the “monetary

base” has only a minor impact on money sup-

ply. The fundamental effect of the creation and

destruction of money is only achieved insofar as

those modifications in the monetary base –in

the money directly created by the ECB– are

transformed into modifications in the money

supply. And that only happens through its im-

pact on the boosting or contraction of bank

lending.

The resources provided to the banking sys-

tem by the European Central Bank are used by

the financial institutions to increase the volume

of loans in the European economy. This process

is considered by some to be “money creation”