Illustration for TIME by STEVE BRODNER

We're Off To See The Wizard
	Critcs say the European Central Bank should use its powers to lift Europe out of its slump. The bank says that's not its job. Who's behind the curtain, anyway?
	By JENNIE JAMES/Frankfurt

And what is that mission? Price stability in the euro zone, plain and simple — a mandate that the E.C.B. interprets as an annual inflation rate of less than 2% over the medium term. It's not easy; since the euro's arrival in 1999, average annual inflation has twice overshot 2% and looks set to do so again this year. Now, with growth sluggish in parts of Europe, some economists are again insisting that the 2% ceiling is too low and that the E.C.B. should revise its aims. "Why have a target you're not going to hit?" asks Iain Begg, author of Running EMU: The Challenges of Policy Coordination. "It calls into question your credibility." Nevertheless, in September, the E.C.B. left interest rates unchanged at 3.25% (vs. 1.75% in the U.S.) for the tenth month in a row. And the 2% inflation ceiling? Says Hämäläinen: "We have no reason to change it or even to discuss it." Some governments like to portray the E.C.B., and its head, Wim Duisenberg, as the all-powerful economic forces of the euro zone — responsible for all problems and able to cure all ills. Pull back the curtain, however, and the bank seems more like the region's Wizard of Oz — powerful in appearance, but with only a limited capacity to solve Europe's woes. After all, it has just one focus — keeping prices stable. That hasn't stopped politicians and economists — many of whom think the E.C.B. interprets its mandate too narrowly — from calling for change at the bank. In some ways that's inevitable; Duisenberg is set to retire next July, and four other board members will also leave over the next four years. But the bank's critics don't want to wait that long. They want a more holistic outlook from the bank, greater transparency and better communication. Most of all, they want the bank governors to look beyond that inflation idyll of 2%. "We'll see with time," says Fabio Scacciavillani, an economic research executive at Goldman Sachs, "whether they have a meaningful objective, or a straitjacket."

STARTING OUT
The architects of European Economic and Monetary Union (EMU) devised the E.C.B. to be just one of the hands on the euro zone's economic steering wheel. The four-year-old bank's 18-strong governing council — the six members of the executive board plus the area's 12 national central bank heads — meets twice a month, once to decide on interest rates and once on other matters. To ensure that — with monetary policy centralized — the euro-zone nations' fiscal policies worked in synch too, the EMU's creators devised the Stability and Growth Pact, which obliged nations to keep their budgets close to balance or in surplus over the medium term. If everybody looked after their own house, went the thinking, things would be fine.

But that's not happening. Last week, Germany, France and Italy, the euro zone's biggest economies, were by necessity given until 2006 to balance their books — two years beyond the previously-agreed date. This provoked Duisenberg to slam some countries' fiscal policies as "very disappointing." But he insisted that — in spite of sluggish growth and expectations that the E.C.B. must soon cut rates — current interest rate levels were "appropriate to maintain price stability over the medium term."

NO MERCY
Troubled countries that ask the E.C.B. — which has no jurisdiction to police the pact — to loosen monetary policy tend not to get much of a hearing. (In fact, if the E.C.B. thought that nations' loose fiscal policies threatened price stability, it might raise rates to deter countries from running big deficits.) Nor do individual nations get much sympathy. "Governments didn't realize or didn't accept fully," says Hämäläinen, "that during the good times it's very important to build buffers." In other words, tough luck.

In part, governments grappling with Europe's doldrums have made a scapegoat of the E.C.B. After all, it's easier to blame the bank for economic shortcomings than it is to tackle tough domestic issues like regulatory and labor reform. But the E.C.B.'s obsession with inflation has contributed to the debate. Though its primary mandate is price stability, the E.C.B. is also supposed to "support the general economic policies" of the euro zone. To be sure, those who remember the ravages of inflation in the '70s applaud the bank's zeal. But reformers say that in a Europe moving toward more integrated markets and an equity-based culture, the bank should put a softer focus on inflation in favor of a broader economic outlook. The U.S. Federal Reserve doesn't have an inflation target, which gives it leeway in pursuing its dual mandate of price stability and maximum employment. (The Fed's reported unofficial goal: inflation below 3%.) The Bank of England aims for 2.5% inflation, a target set by the U.K. government. The E.C.B.'s 2% figure was inherited from Germany's Bundesbank, along with Otmar Issing, a former Bundesbank chief economist who is the E.C.B.'s head of economics.

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