The ECB and the Stability Pact: policeman and judge?

Abstract

The European Central Bank (ECB) has taken a forceful position in demanding that Euro-zone member states (acting collectively in the Eurogroup) maintain a strict interpretation and enforcement of the Stability Pact rules. This article challenges Artis and Winkler's (1997) use of the 'chicken game' as a model to capture the strategic interaction of the ECB with the Eurogroup with regard to the Stability Pact. It is argued that the ECB has been involved in an iterative strategic interaction with the Eurogroup, threatening to adopt 'tighter' monetary policy in order to punish fiscally wayward Eurogroup members, while for the purposes of actual monetary policy-making focusing upon its inflation target alone. The article proposes refinements in the strategic interaction to improve its analytical usefulness: the interaction involves the ECB and multiple players at once and the interaction must take into consideration the complexities of ECB monetary policy decision-making, notably the two-pillar strategy. The ECB has modified its monetary policy strategy given the potential economic and political difficulties created by the singular pursuit of Euro-zone wide monetary stability without accepting a 'lax' policy position in the iterative game.

Keywords:

• EMU
• Eurogroup
• European Central Bank
• Euro-zone
• game theory
• Stability and Growth Pact