Monetary Policy within the Eurozone

Following the prescription of contemporary economic theory to develop rules and institutions to enforce time-consistent policymaking, the European Central Bank (ECB) is a creation of the TEU, which designed it to be the most independent monetary authority in the world. The ECB’s architects sought to insulate it completely from political pressures, both at the national government and at the eurozone level. The position of the ECB under the TEU permits no clear accountability to either national or federal European institutions. It stipulates that the ECB Council’s deliberations remain confidential, whilst the only method of questioning the ECB’s policies is through periodic reports to the European Parliament. Although commentators have concentrated upon criteria denoting initial convergence for eurozone membership, stringent rules restrict national fiscal policies, and the benefits deriving from the eurozone; however, far less attention has been paid to how the eurozone will operate in practice. In particular, the institutional design of the eurozone stipulates a central role for an ECB, established to be independent of government and charged with sustaining the stability of the currency zone in the face of asymmetric external shocks. The ECB is the sole body credited with determining the appropriate monetary and exchange-rate policy for the entire eurozone and as such its ability to fulfil its stated objectives is crucial to its success or failure, as has been demonstrated by the eurozone crisis.