The European Central Bank: Between Growth and Stability

The European Central Bank (ECB) is the most independent of all Central Banks. Indeed, its independence was guaranteed by its statute in order to ensure, as its exclusive goal, the achievement of monetary stability, defined as a level of inflation below 2%. While independence from political constraints, both national and supra-national, provoked concerns about the Union's democratic deficit, it allowed central bankers to concentrate, at least in theory, solely on monetary variables, and to ignore the performance of the real economic indicators, namely growth and employment rates. However, the ECB's monetary policy has not been conducted entirely without regard to the performance of the real economy. This article seeks to explain why the ECB departed from its stated commitments to monetarism from the inception of the euro in 1999 until 2002. The dependent variable is therefore the shift of emphasis in the monetary ‘practice’ of the ECB from price stability to growth and employment. The shift in orientation is explained with reference to the interests of the most powerful euro-zone states, which were, in turn, responding to powerful domestic actors. This analysis is conducted within the framework of a revised, ‘embedded’ version of intergovernmentalism by Moravcsik, which adds to the traditional intergovernmentalist framework an explicit theory of state interest formation within a two-level game approach to European economic policy-making. In particular, this article suggests the utility of Frieden's model on the exchange rate preferences of economic sectors for the analysis of ECB policies.