On European Central Bank – annual report 2023

MOTION FOR A EUROPEAN PARLIAMENT RESOLUTION

on European Central Bank – annual report 2023

(2023/2064(INI))

The European Parliament,

– having regard to the European Central Bank (ECB) annual report 2022,

– having regard to the ECB’s feedback of 25 May 2023 on the input provided by the European Parliament as part of its resolution on the ECB’s annual report 2021,

– having regard to the Statute of the European System of Central Banks (ESCB) and of the ECB, in particular Articles 15 and 21 thereof,

– having regard to Articles 123, 127(1) and (2), 130 and 284(3) of the Treaty on the Functioning of the European Union (TFEU),

– having regard to the Eurosystem staff macroeconomic projections of 15 June 2023 for the euro area and the decisions taken by the ECB Governing Council,

– having regard to the monetary dialogues between its Committee on Economic and Monetary Affairs and President of the ECB Christine Lagarde of 20 March 2023 and 5 June 2023,

– having regard to the Commission proposal of 28 June 2023 for a regulation of the European Parliament and of the Council on the establishment of the digital euro (COM(2023)0369),

– having regard to its decision of 1 June 2023 on the arrangements in the form of an exchange of letters between the European Parliament and the ECB on structuring the practices for interaction in the area of central banking,

– having regard to Rule 142(1) of its Rules of Procedure,

– having regard to the report of the Committee on Economic and Monetary Affairs (A90000/2023),

A. whereas, according to the June 2023 Eurosystem staff macroeconomic projections, the growth of the euro area economy is expected to slow down from 3.5 % in 2022 to 0.9 % in 2023; whereas, according to a Eurostat flash estimate, the euro area grew by just 0.6 % in 2023; whereas this represents the worst performance since the recession of 2020;

B. whereas, according to the June 2023 Eurosystem staff macroeconomic projections for the euro area, headline inflation is expected to average 5.4 % in 2023, 3.0 % in 2024 and 2.2 % in 2025, despite falling energy prices and easing supply bottlenecks; whereas core inflation has been more persistent, with an increase to 5.5 % in June 2023, and is projected to overtake headline inflation in the near term and to remain above it until early 2024, mainly owing to strong wage growth;

C. whereas, according to the Commission 2023 economic forecast, government deficits are projected to decline to 3.1 % of GDP in 2023 and 2.4 % in 2024; whereas the government debt to GDP ratio decreased in the euro area from 95.0 % to 91.2 % and in the EU-27 from 87.4 % to 83.7 % in 2022 and 2023 respectively;

D. whereas the ECB is politically independent, which means that neither EU institutions and agencies nor Member State governments should seek to influence it;

E. whereas the ECB’s primary objective is to maintain price stability, which it has defined as 2 % inflation over the medium term;

F. whereas Article 123 TFEU and Article 21 of the Statute of the ESCB and of the ECB prohibit the monetary financing of governments;

General overview

1. Welcomes the role of the ECB in safeguarding euro stability; underlines that the statutory independence of the ECB, as laid down in the Treaties, is a prerequisite for it to fulfil its mandate of maintaining price stability;

2. Underlines that price stability is a prerequisite for the ECB to deliver on its mandate to support the EU’s general economic policies, such as the green and digital transitions; stresses that price stability is essential for attracting long term investments;

3. Fears that, without properly delivering on its mandate of maintaining price stability, the ECB risks losing its legitimacy;

4. Is deeply worried about the persistently high inflation rates, especially core inflation rates, and their detrimental impact on competitiveness, investments, job creation and the purchasing power of consumers;

5. Expresses concern about the high levels of debt and government deficits within the Member States and the risks that this entails; notes that the situation is worse in the euro area than in non-euro area Member States; looks forward to the outcome of the Commission’s legislative proposals on revising the EU’s economic governance rules and welcomes the ECB’s opinion in this regard;

6. Regrets Russia’s ongoing aggression against Ukraine; agrees with member of the Executive Board Isabel Schnabel on the risk the war entails in terms of negative supply side shocks;

7. Highlights that not only do persistent high levels of inflation, the ongoing war in Ukraine and high levels of debt in the Member States threaten the competitiveness of the European economy, and thus the international role of the euro as well, but also the upward price pressure following the implementation of the European Green Deal, the rise of fragmentation and protectionism in global trade, and an impending subsidy race between states;

8. Echoes President Lagarde’s warning that fiscal support should be targeted and limited and should not hinder the task of monetary policy; points out that governments, as well as the Commission, can support citizens and industries not only through fiscal measures, but also by focusing on growth-enhancing reforms;

9. Welcomes the ECB’s support for a well thought out completion of the banking union and the capital markets union; recalls that this would contribute to a larger spread of risks within and the enhanced financial stability of the monetary union;

Monetary policy

10. Notes that headline inflation has come down from 8.4 % in 2022 to 5.4 % in 2023, mainly driven by lower energy prices and the easing of supply bottlenecks; observes, however, that inflation remains well above the target level of 2 %; is concerned about second-round effects;

11. Expresses its uneasiness with the persistently high rate of core inflation; understands that wage growth is expected to remain more than double its historical average, driven by inflation compensation and the tight labour market; encourages the ECB, furthermore, to look into and report on the inflationary effect of the green transition;

12. Points out that inflation already began rising above target levels in 2021, thus before Russia’s unprovoked aggression in Ukraine; deplores, however, that the ECB only started to tackle inflation in June 2022, even though the COVID-19 crisis proved that it is able to act in a timely manner; notes that other central banks acted more promptly;

13. Fully supports President Lagarde’s statement on fighting inflation for as long as necessary; applauds President Lagarde’s plea for humility and to regularly update the ECB’s models; invites the ECB, however, to fundamentally review its models and their role in its policymaking;

14. Trusts that the ECB will deliver on its mandate to safeguard price stability; notes that real interest rates are still negative;

15. Notes the inflation target level of 2 % in the medium term; observes that inflation has, thus far, either been well below or far above this target level; questions the scientific evidence for this 2 % target level, as well as the meaning of ‘medium term’; invites the ECB to look into a more qualitative approach to price stability;

16. Supports the ECB’s decision to scale back its asset-purchasing programmes, in view of the excess liquidity in the market; notes the ECB’s announcement to decarbonise its corporate bond holdings by ‘tilting’ its portfolio; stresses the importance of the quality of the collateral;

Other aspects

17. Expresses concern about the steady divergence of TARGET2 balances within the ESCB; fears that this may give rise to conflict in the future; notes that the interpretation of these divergences is contested;

18. Welcomes the attention that the ECB pays to the risks of cyberattacks; encourages the ECB to maintain this awareness, especially in the light of the current geopolitical context; calls for the ECB not to relax its monitoring of the development of cryptocurrencies and the related risks in terms of cybersecurity, money laundering, terrorist financing and other criminal activities related to the anonymity provided by crypto-assets;

19. Takes note of the ECB’s progress on the digital euro project and welcomes its dialogue with Parliament in this regard; reiterates that a digital euro must respect competition in the banking landscape, must not endanger the existence or use of cash and must respect the privacy of citizens and businesses;

20. Shares the ECB’s concern regarding the rise of the shadow banking sector and the risk it may pose to financial stability; stresses the need for adequate regulation in this field;

21. Welcomes the Basel III framework, as it will strengthen the resilience of the banking sector; warns about the risk of non-compliance;

Accountability

22. Acknowledges the ECB’s openness and availability to Parliament; welcomes the formalisation, in writing, of the current accountability practices between the ECB and Parliament;

23. Welcomes the ECB’s substantial and detailed feedback on Parliament’s resolution on the 2021 ECB annual report; calls on the ECB to maintain this commitment to accountability and to continue publishing its written feedback on Parliament’s resolutions on the ECB annual reports every year;

24. Welcomes the ECB’s new communications policy, which includes more accessible ways to explain and present ECB policy decisions to citizens and stakeholders;

25. Invites the ECB to engage in a dialogue with national parliaments; believes that this would strengthen the legitimacy and policies of the ECB;

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26. Instructs its President to forward this resolution to the Council and the Commission.

EXPLANATORY STATEMENT

For more than a decennium, since the Great Recession of 2008, the euro area has only known very moderate inflation numbers. The self-imposed inflation target of 2% was hardly reached. During this era, the ECB tried to ignite the European economy by injecting considerable amounts of liquidity in the markets. Quantitative easing was the recipe of the day, low (even negative) interest and asset purchasing programmes its ingredients.

Whether the envisaged ignition truly worked, is questionable. Productivity growth, as well as its innovation rate remained rather flat at just short of 1%. Other advanced economies were able to score better results.

Other side effects of these policies were ever higher amounts of accumulated debt, be it for households, businesses or governments. The low interest rates left room for highly indebted countries to comfortably pursue the needed reforms or bring down government and deficits. However, here as well, the results are rather bleak. The persistent low interest rate gave all too much comfort and gave little proper incentive to pursue growth-enhancing reforms. The feeble enforcement of the Stability Growth Pact clearly did not help either. Public debt remains very high, housing prices have been skyrocketing, zombie firms roam through the economy, while interest rates did little to save people’s savings.

In the comfort zone of easy money, geopolitical stability, relatively open global trade and ‘business as usual’, policy makers discovered new ideas and alibis for expansive fiscal and monetary programs, such as the - in se surely legitimate - fight against climate change. Even though the EU only accounts for 8% of global CO2 emissions, extensive and capital intensive programs were launched. The low interest rate environment would ease the cost of the necessary investments and the ECB was encouraged to share this point of view. In a time where price stability was almost a given, giving more attention to what the ECB mandate describes as ‘other general economic policies of the Union’, seemed attractive.

At least, until Mr. Xi’s Covid-19 virus and the subsequent lockdowns disrupted severely the deeply intertwined global supply chains. Two years later, Mr. Putin’s aggression towards Ukraine did the same for the energy landscape. Supply and demand were no longer evenly matched, prices started to rise, inflation hiked to double digit figures. Government programmes, set up in the aftermath of the Covid and energy crisis to ease the cost of the supply shocks, only added fuel to the inflationary fire. Meanwhile, the Green Deal, and foremost the costly and little flexible way it was designed, kept dominating the Brussels agenda. At the same time, legislators in Washington found agreement on a large, yet more flexible, market neutral program that would do little to curb inflation: the Inflation Reduction Act.

Even though price stability is the first and almost only mandate of the ECB, the institution observed that the inflation, that was making so much havoc amongst people and business alike, was only ‘transitory’. For all too long, the ECB seemed stuck in some sort of ‘path dependency’ and did little to nothing to fight inflation, even though other central banks were already starting to raise their interest rates. The results were damaging: industries cutting investments in the EU, or even relocating their business to other major trading blocs or just passing through the cost of inflation on their consumers, which later would be called ‘greedflation’ by the ECB.

Ultimately, the ECB stopped its quantitative easing in the summer of 2022 with several interest rate hikes the last year. Headline inflation has come down, however, core inflation remains persistently high and is far above the inflation target of 2%. The ‘transitory’ inflation seems to be quite sticky, yet interest rates are still below the inflation rate.

In a world that all the more becomes more fragmented and even turns towards protectionism, where a subsidy race is looming, a green and digital transition is taking place and second round effects of inflation are on the horizon, Europe is rediscovering the virtue of having a geopolitical mindset and the importance of manufacturing industries, resulting in industrial policies. It is now more clear than ever that price stability really must be at the very core of the ECB policy making. Only price stability creates the conditions for attracting long term investments.

The Treaty grants the ECB independence from political influence to achieve this price stability. However, with independence comes responsibility. Failing on delivering on its prime mandate would be devastating for the legitimacy the ECB has with the public.

In this regard, it is applaudable that ECB president Lagarde shows no ambiguity in her message that she will fight and keep fighting inflation, yet at the same time indicates that the models of the past may no longer be fit for purpose in the future. Indeed, looking back at the history of the inflation target and its estimations, it is clear that the 2% norm was rather utopial. A proper reassessment of the models, as well as the role these models play in policy making is needed. The same goes for the self-imposed 2% norm in the medium term. What scientific evidence backs this target, while also being able to weather out the test of reality? Perhaps a more qualitative approach is more suited.

Other topics deserve attention from the ECB and/or the public as well, such as the question whether the monetary union would really benefit from the introduction of a digital euro, whether public finances would favour from the proposed rules in the economic governance package and whether the risks that the shadow banking sector or the crypto industry are sufficiently regulated, monitored and contained, just to name a few.