Why does the Fed focus on maximum employment, while the ECB does not?

Later this month, the central banks of the United States and Europe will announce their next interest‑rate decisions. While the Federal Reserve operates under a dual mandate—price stability and maximum employment—the European Central Bank (ECB) focuses primarily on controlling inflation. Where does this difference come from? We discuss it with Charles Kalshoven, expert strategist at APG.

As the U.S. Senate in Washington considers the nomination of Kevin Warsh as the new Fed chair, we look back. What is the origin of the different mandates of the Fed and the ECB?
“The difference is deeply rooted in history. In the United States, the economic trauma of the twentieth century is the Great Depression of the 1930s. Mass unemployment, deflation and the sense that the government and the central bank failed to act decisively left a lasting mark. Out of that experience grew the belief that a central bank should not only keep inflation in check, but also actively help prevent prolonged unemployment. That dual mandate was formally enshrined in legislation in 1977.

“In Europe—and especially in Germany—the trauma lies elsewhere. There, hyperinflation in the Weimar Republic in 1923 was decisive. Savings and pensions were wiped out, particularly for the middle class. That experience led to the conviction that price stability is essential, not only for economic predictability but also for social trust and political stability. The chaos of shortages and inflation in the years after World War II reinforced this view among the generation that later built the Bundesbank. That intellectual tradition ultimately shaped the design of the ECB.”

Does this mean the ECB essentially follows a ‘German’ model?
“To a large extent, yes. The ECB builds on the Bundesbank tradition, with price stability as its primary objective. That was explicitly laid down at the creation of the euro. For Germany, a strong and stable currency was a precondition for giving up the Deutsche Mark.

“At the same time, there was a broader political bargain. France backed German reunification in 1990, and Germany agreed to the introduction of the euro. Other euro‑area countries accepted the strict mandate partly because the common currency was seen as a step toward deeper European integration. Price stability was also viewed as something that would ultimately support growth and employment, albeit indirectly. In addition, countries with a history of high inflation, such as Italy, were able to ‘borrow’ the Bundesbank’s credibility, which resulted in lower interest rates and greater confidence.”

Do economic differences between the U.S. and Europe also play a role?
“Absolutely. The U.S. labor market is much more flexible: jobs are created and lost more quickly, which means economic shocks translate directly into unemployment. That increases the need for the Fed to respond actively.

“Europe has a stronger social safety net and places more emphasis on long term stability. The ECB’s view is that it best supports the economy by keeping inflation low and predictable. There is a clear economic rationale behind that. A central bank can mainly influence the demand side of the economy through interest rates. The supply side cannot be stimulated in the short term, but it can be damaged if inflation spirals out of control. When that happens, companies hesitate to invest and innovate, and employers and employees try to pass costs on to one another. That undermines the foundation for sustainable growth.”

Does the difference in mandate really matter in practice?
“Not as much as you might think. After the financial crisis of 2008, both the Fed and the ECB pursued very accommodative monetary policies for an extended period. One difference is that the Fed began purchasing government debt years earlier than the ECB. The ECB only took that step when inflation expectations risked falling too low and monetary policy threatened to lose its effectiveness.

“On the other hand, the ECB went further than the Fed in cutting interest rates, even pushing them below zero. So there are differences, but they shouldn’t be overstated. The two central banks are not identical twins, but they clearly belong to the same family.

“During the inflation shock of 2021–2023—caused by the aftermath of the pandemic and Russia’s invasion of Ukraine—both the Fed and the ECB raised interest rates sharply. From 2024 onward, both began cutting rates again.”

So in practice, the ECB is not as doctrinaire as it might seem?
“No. Formally, price stability is its primary objective, but the EU treaties also state that the ECB should support the broader goals of the European Union, including employment and financial stability. Those objectives are closely interconnected. High unemployment and economic damage caused by financial instability can push inflation below target.

“So while the ECB’s mandate is formally narrower than that of the Fed, in practice it also takes growth, jobs and financial stability into account—precisely because these factors affect inflation. In the end, all central banks face the same trade offs. Economic reality often forces them toward similar choices, even if they officially start from different mandates.”