Perilous ECB Balancing Act

J. Soedradjad Djiwandono
J. Soedradjad Djiwandono, Emeritus Professor of Economics, Faculty of Economics and Business, Universitas Indonesia, and Adjunct Professor of International Economics, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore.

Jakarta, IO – Steep inflation was surging in the USA; the Fed responded by cranking up Fed fund rates, time and again, in the effort to suppress it. Across the Atlantic, the ECB, under President Christian Laggard, saw fit to follow the same path. 

The meaningful difference was that while Fed fund rates already stood in a range of several percent, discount rates at ECB were still mired in negative territory. Further, a new challenge recently arose, with the Russian military incursion into Ukraine, a nation at war with their Russian-speaking minority in the East since 2014. 

Two challenges thus faced the ECB: to judiciously tame the rate of inflation and to provide a fallback position for perpetually weak economies, such as those of Italy, Spain and Portugal. Tenuous political machinations did nothing to help stabilize energy and food price increases. The sudden resignation of Italian PM Mario Draghi, and its potential impact, injected further uncertainty into the socioeconomic scenario, as the well-respected technocrat faced a loss of confidence by his coalition partners, and felt he could not continue as a national leader. 

Fortunately, the ECB, guided by the steady hand of President Christian Laggard, managed to design workable policies which will, at least for the time being, meet on coming challenges head-on, through close interest rate management, reinforced by a scheme whereby the ECB basically purchases government and private debt instruments. This is meant to avoid the specter of the aforementioned sick state economies being overwhelmed by debt and going under.