Quotes of the Day

Show the European Central Bank a set of high unemployment figures — the kind, say, that are currently haunting Germany, where the jobless rate is at 9.6%. It will pass them back and explain that job creation is not its bailiwick. Prod it on the euro's fortunes in the currency markets, and the E.C.B., which sets interest rates across the 12-nation euro zone, will sigh that exchange rates are not its concern, either. Bring up last week's hot topic in Brussels — the fact that some nations, struggling to cope with the euro zone's Stability and Growth Pact, which prohibits a budget deficit greater than 3% of GDP, could really use some help during this deep-and-wide slump — and the E.C.B. will offer up a shrug and not much else. "We do not try to please anybody," Sirkka Hämäläinen, a member of the E.C.B.'s executive board, told Time. "We have our mission, our duty."

And what is that mission? Price stability in the euro zone, plain and simple — a mandate that the E.C.B. interprets as an annual inflation rate of less than 2% over the medium term. It's not easy; since the euro's arrival in 1999, average annual inflation has twice overshot 2% and looks set to do so again this year. Now, with growth sluggish in parts of Europe, some economists are again insisting that the 2% ceiling is too low and that the E.C.B. should revise its aims. "Why have a target you're not going to hit?" asks Iain Begg, author of Running EMU: The Challenges of Policy Coordination. "It calls into question your credibility." Nevertheless, in September, the E.C.B. left interest rates unchanged at 3.25% (vs. 1.75% in the U.S.) for the tenth month in a row. And the 2% inflation ceiling? Says Hämäläinen: "We have no reason to change it or even to discuss it." Some governments like to portray the E.C.B., and its head, Wim Duisenberg, as the all-powerful economic forces of the euro zone — responsible for all problems and able to cure all ills. Pull back the curtain, however, and the bank seems more like the region's Wizard of Oz — powerful in appearance, but with only a limited capacity to solve Europe's woes. After all, it has just one focus — keeping prices stable. That hasn't stopped politicians and economists — many of whom think the E.C.B. interprets its mandate too narrowly — from calling for change at the bank. In some ways that's inevitable; Duisenberg is set to retire next July, and four other board members will also leave over the next four years. But the bank's critics don't want to wait that long. They want a more holistic outlook from the bank, greater transparency and better communication. Most of all, they want the bank governors to look beyond that inflation idyll of 2%. "We'll see with time," says Fabio Scacciavillani, an economic research executive at Goldman Sachs, "whether they have a meaningful objective, or a straitjacket."

STARTING OUT
The architects of European Economic and Monetary Union (EMU) devised the E.C.B. to be just one of the hands on the euro zone's economic steering wheel. The four-year-old bank's 18-strong governing council — the six members of the executive board plus the area's 12 national central bank heads — meets twice a month, once to decide on interest rates and once on other matters. To ensure that — with monetary policy centralized — the euro-zone nations' fiscal policies worked in synch too, the EMU's creators devised the Stability and Growth Pact, which obliged nations to keep their budgets close to balance or in surplus over the medium term. If everybody looked after their own house, went the thinking, things would be fine.

But that's not happening. Last week, Germany, France and Italy, the euro zone's biggest economies, were by necessity given until 2006 to balance their books — two years beyond the previously-agreed date. This provoked Duisenberg to slam some countries' fiscal policies as "very disappointing." But he insisted that — in spite of sluggish growth and expectations that the E.C.B. must soon cut rates — current interest rate levels were "appropriate to maintain price stability over the medium term."

NO MERCY
Troubled countries that ask the E.C.B. — which has no jurisdiction to police the pact — to loosen monetary policy tend not to get much of a hearing. (In fact, if the E.C.B. thought that nations' loose fiscal policies threatened price stability, it might raise rates to deter countries from running big deficits.) Nor do individual nations get much sympathy. "Governments didn't realize or didn't accept fully," says Hämäläinen, "that during the good times it's very important to build buffers." In other words, tough luck.

In part, governments grappling with Europe's doldrums have made a scapegoat of the E.C.B. After all, it's easier to blame the bank for economic shortcomings than it is to tackle tough domestic issues like regulatory and labor reform. But the E.C.B.'s obsession with inflation has contributed to the debate. Though its primary mandate is price stability, the E.C.B. is also supposed to "support the general economic policies" of the euro zone. To be sure, those who remember the ravages of inflation in the '70s applaud the bank's zeal. But reformers say that in a Europe moving toward more integrated markets and an equity-based culture, the bank should put a softer focus on inflation in favor of a broader economic outlook. The U.S. Federal Reserve doesn't have an inflation target, which gives it leeway in pursuing its dual mandate of price stability and maximum employment. (The Fed's reported unofficial goal: inflation below 3%.) The Bank of England aims for 2.5% inflation, a target set by the U.K. government. The E.C.B.'s 2% figure was inherited from Germany's Bundesbank, along with Otmar Issing, a former Bundesbank chief economist who is the E.C.B.'s head of economics.

Is 2% appropriate now? Before June, euro-zone inflation came in at over 2% almost every month for two years. As a result, though growth has been below projections since early 2001, the E.C.B. has cut rates just four times since then — while the Fed has slashed rates 11 times during the same period. "It's a very demanding target," says Klaus Baader, senior international economist at Lehman Brothers. "Getting it can take a price too high to pay."

Like deflation. Research suggests that, where inflation targets are below 2%, there is an increased chance of a pricing downturn and a corresponding contraction of commercial activity. Economists are already comparing Germany — where August year-on-year inflation stood at 1% — with Japan, which is locked in a nasty deflationary spiral. Once again, the E.C.B. says it is not concerned with individual nations, and points to other parts of the euro zone. In Italy, August year-on-year inflation was 2.6%; in Ireland, 4.5.%.

But Germany is Europe's biggest economy. In the worst-case scenario, a deflationary Germany could suck other countries down with it. While the E.C.B. insists there is no danger, economists are issuing warnings. "Once you get stuck in negative inflation territory," says Adair Turner, vice chairman at Merrill Lynch Europe, "it can be increasingly difficult to get out." Turner says the bank should not just have an inflation ceiling, but also a floor. "The E.C.B. should be as worried about inflation below 1.5% as inflation above target. If very low inflation threatens, it should deliberately stimulate the economy."

TELL IT LIKE IT IS
In the financial markets in particular, there's a frustration with the E.C.B.'s opaque processes and woolly pronouncements. When asked to define "the medium term," for example, Hämäläinen concedes that the bank has no exact interpretation. Although both the Bank of England and the Federal Reserve publish minutes of their meetings — the Bank of England within two weeks and the Fed generally within two months — the E.C.B. does not, opting for a monthly report. Complains Goldman Sachs' Scacciavillani: "The E.C.B. says the monthly bulletin is a good surrogate for minutes, but it's not necessarily true. It's not an accurate record of the internal debate." The rules against publishing minutes were designed to protect governing council members from national pressure. But should the E.C.B. fail to meet its targets, it faces no punitive measures. If inflation in the U.K. deviates 1% either side of the 2.5% target, the Bank of England's governor must write a letter of explanation. The E.C.B.'s only penalty is a loss of credibility.

The E.C.B. is curiously determined to have Europeans believe that it is immune to heated debate. In June, Market News International, a financial wire service, ran an account, sourced to a central banker, of a fiery meeting the week before — when some E.C.B. bankers, worried about inflation, were pushing for a rate hike the following month. The E.C.B. dismissed the report as speculation. The bank prides itself on consensus and insists its meetings do not feature strongly divergent points of view. That seems unlikely; as the old joke goes, put three economists in a room and you get four opinions.

FOLLOW THE LEADER
As the duisenberg succession nears, the nationalism that has always swirled around the E.C.B.'s leadership will become a whirlpool. (Things were already heated, with France insisting that the next head must be French.) And that vortex could be more intensified by nations with sluggish growth, which may plump for a head with an expansionary approach.

Still, political interference in the process is nothing new. It initially centered around French- German rivalry: in 1998, French President Jacques Chirac reportedly bullied European leaders into agreeing that when Duisenberg retired, his successor would be a French banker, namely Jean-Claude Trichet, head of the Bank of France. Apparently Duisenberg, who as Dutch central bank head oversaw a guilder tied to the deutsche mark, was too close to Germany for Chirac's liking. But Trichet is facing allegations of compliance in the publication of false accounts by the state-run bank Credit Lyonnais in the early '90s, when he was director of the Finance Ministry. He has been questioned about his role already — but having first been cleared, he was then sent to stand trial. The proceedings may not take place until May, close to the E.C.B. leadership changeover.

Other French candidates include Christian Noyer, a former E.C.B. vice president, although there is doubt that he can sit on the executive board twice, and Jean Lemierre, head of the European Bank for Reconstruction and Development. But for many, Trichet — who has the communication skills and media savvy that Duisenberg lacks — remains the yardstick.

• JENNIE JAMES / Frankfurt
• Is it time for the E.C.B. to help out? Not us, they say.