(Bloomberg) -- The European Central Bank is confronting new economic realities and governments should do the same, said Governing Council member Francois Villeroy de Galhau.
Policymakers have learned to be nimble during times of great volatility, when supply shocks no longer impact inflation and the economy in only one way, Villeroy said in a speech in London.
They’re finding new strategies to anchor expectations as keeping price pressures at their target for long times is becoming increasingly unrealistic, he added. And they’re using some of their hard-earned credibility to encourage governments to ensure their economies will be able to continue to grow.
“Monetary policies should not be ‘the only game in town’; but they could even not be the ‘central game’,” Villeroy said. “For our economies to show resilience, structural policies have to follow suit.”
ECB officials led by President Christine Lagarde have repeatedly reminded politicians that the economic fate of the 20-nation euro zone is in their hands, calling for vital fiscal and structural reforms to make the region more productive and competitive. Their warnings come amid large-looming challenges that include shifting global alliances and a transition toward greener energy.
Villeroy argued that speaking about structural reforms and fiscal consolidation — as a central banker — “is not without risks.”
“We are not the deciders there,” and it’s important to stress “that we accept our views to be discussed and even contested,” he said. “But in today’s Europe and today’s world, where non-monetary action is both more necessary and more difficult than ever, this risk may be worth taking for central banks.”
Unfortunately, he said, “many of these governments are at present politically weakened, under pressure of short-termism, conflicting objectives and national biases.”
The ECB for its part knows it must stay alert and be even more thorough in analyzing data in the face of more frequent supply shocks and increased volatility, Villeroy said. It also knows that its policy response to too high or too low inflation going forward will have to be different from the past.
“What matters is not so much the level of deviation from target at one point in time, but the trend and persistence of expected deviations, in other words, whether this deviation is more likely to increase,” he said.
“We, central bankers of the 21st century, have started to learn how to manage uncertainty in an unprecedented succession of shocks,” he said. “We stand ready to adapt to this new environment of Great Volatility and to act where needed, in order to remain an anchor of stability.”
©2024 Bloomberg L.P.
