Does the ECB still look at the overall situation of the Eurozone? - Natixis

Patrick Artus, Research Analyst at Natixis, explains that in principle, the ECB chooses its monetary policy based on the overall situation of the euro zone and not on the specific situations of the different euro-zone countries.

Key Quotes

“But is this still the case today? Going by the past, the situation of the euro zone would now require a more restrictive monetary policy. But a more restrictive monetary policy in the euro zone would drive up longterm interest rates, which would be dangerous for the countries in difficulty - in particular Italy. So are there empirical signs that the ECB reacts no longer to the overall situation of the euro zone but to that of Italy?”

“Econometric analysis shows that over the period 2010-2017, the euro repo rate is explained better by Italian data (inflation, especially unemployment) than by euro-zone data: is the ECB paying special attention to Italy?”

“An econometric analysis of how the ECB sets the euro repo rate shows that:

- The usual setting of the euro repo rate would now lead to a more restrictive monetary policy. This led us to examine whether the ECB is protecting Italy by not reacting to the overall situation of the euro zone;

- The euro repo rate over the period 2010-2017 can be explained better by Italian data (in particular unemployment) than euro-zone data.”