buiter51_Andreas RentzGetty Images_lagarde Andreas Rentz/Getty Images

The ECB Should Change Three Bad Habits

There are three main reasons for the European Central Bank's excessive inertia in the facing of changing economic circumstances, and all relate to its internal decision-making process. Fortunately, that means the problem that has plagued it in recent years is fixable from within.

NEW YORK – The European Central Bank too often finds itself “behind the curve” of events, and we believe the blame lies with its decision-making process, rather than its institutional setup or personnel. As ECB President Christine Lagarde revealed at the December 14, 2023, press conference, “We did not discuss rate cuts at all… between hike and cut, there’s a whole plateau, a whole beach of hold.”

This statement was not just peculiar, but unhelpful. At the time Lagarde uttered it, six-month annualized eurozone core inflation (excluding food and energy prices) was at 2.5%, based on ECB data, having fallen for several months, to the surprise of everyone. While virtually all ECB Governing Council members now argue that monetary policy is restrictive, the totality of inflation and activity data – hard and soft, coincident and leading – ought to have invited a discussion about whether it is too restrictive.

Lagarde’s comment was nonetheless instructive, because it shows that the ECB is anchoring the timing of a potential rate cut to the timing of the last hike – that is, to the past. The implication is that the ECB’s decision-making process is not only too slow (outside of crises) but also excessively backward-looking.