krauss46_GEOFFROY VAN DER HASSELTAFP via Getty Images_christine lagarde Geoffroy van der Hasselt/AFP via Getty Images

The ECB’s New Stealth Mandate

Over the course of the pandemic, the European Central Bank has effectively adopted a new mandate, perhaps having concluded that its inflation target is unattainable without more fiscal stimulus. The new top priority appears to be financial solidarity within the eurozone, and it could not have come at a better time.

STANFORD – The European Central Bank’s monetary policy has undergone a peculiar change during the pandemic. Something other than the goal of price stability appears to be guiding the bank’s overall approach, suggesting that it has adopted a new mandate without publicly announcing it.

Since the start of the COVID-19 crisis, the ECB has succeeded in closing the gap between northern and southern member states’ borrowing costs, bringing eurozone North-South yield spreads to historic lows. And with Europe facing multiple threats to its unity – from Donald Trump’s administration and Vladimir Putin’s revanchist Kremlin to an increasingly assertive China and homegrown populists – policymakers have effectively adopted “spread narrowing” as a new mandate.

ECB President Christine Lagarde and her colleagues seem to recognize that ensuring European unity and solidarity is the most important objective an institution like the ECB can pursue at this critical moment. Though no one at the bank is likely to admit it, there is little question that they are now in the business of holding down spreads.