ECB Can Prove Its Independence from Politics in 2019

As expected, the Governing Council of the European Central Bank (ECB) has not made any changes to its interest rate policy in its first policy meeting this year. Professor Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Research Department at the ZEW – Leibniz Centre for European Economic Research, offers his view on the ECB's decision.

“It may seem as if the ECB is facing a year of passivity, during which no important decisions will be made. This impression is, however, deceptive. It is true that the first interest rate hike is very likely to be postponed until 2020 in view of the weaker economy. In other areas, however, the ECB will have to make important basic decisions.

Firstly, the central bank has to decide whether it will once again generously support Italy’s ailing banks through its long-term refinancing operations (LTRO). Secondly, the ECB would be well-advised to rapidly reduce the share of Italian and Spanish government bonds in its portfolio in order to correct the large deviations from the new ECB capital key. And thirdly, as the EU’s banking supervisory authority, the ECB should increase the pressure on Italian banks to provision for bad loans in their balance sheets.

Beyond traditional monetary policy, 2019 offers plenty of opportunities for ECB President Mario Draghi to prove the ECB’s independence from politics and the European elections before his term expires in November 2019.”