Former central bankers attack ECB’s monetary policy

A group of former senior European central bankers has published a memo attacking the loose monetary policy of the European Central Bank, which they argued was “based on the wrong diagnosis” and risks eroding its independence.

Their criticism comes in response to a package of easing measures announced by the ECB last month that triggered unprecedented opposition within the top echelons of the central bank.

The rare public attack on the ECB underlines how Christine Lagarde could have a fight on her hands after she takes over from Mario Draghi as president of the bank at the end of this month, if — as expected — she decides to loosen monetary policy further in the face of the eurozone’s mounting economic slowdown.

“As former central bankers and as European citizens, we are witnessing the ECB’s ongoing crisis mode with growing concern,” said the memo that was signed by several German, Austrian, Dutch and French former central bankers including Jürgen Stark and Otmar Issing, who both worked as ECB chief economist.

Last month’s ECB package included a cut in the deposit rate to a record low of -0.5 per cent and a resumption of its €2.6tn quantitative easing programme of bond-buying, which its outgoing president Mr Draghi said was necessary to boost flagging inflation and economic growth.

“The ECB essentially justified in 2014 its ultra-loose policy by the threat of deflation,” the former central bankers wrote in their memo. “However, there has never been any danger of a deflationary spiral and the ECB itself has seen less and less of a threat for some time. This weakens its logic in aiming for a higher inflation rate. The ECB’s monetary policy is therefore based on a wrong diagnosis.”

The ECB declined to comment in response to the memo. Supporters of the central bank rejected many of the criticisms, pointing out that its main objective had always been to achieve inflation of close to 2 per cent. Allies of the ECB also pointed out that without the central bank’s efforts both growth and inflation would have been significantly lower.

Other signatories of the memo included Hervé Hannoun, a former deputy governor of the Banque de France; Klaus Liebscher, former head of the Austrian central bank; Helmut Schlesinger, former head of Germany’s Bundesbank; and Nout Wellink, former head of the Dutch central bank.

Many of the former central bankers are well known for having a hawkish view of monetary policy, in opposition to the ECB’s position, but the group said its memo also had the support of Christian Noyer and Jacques de Larosière, the more moderate former heads of the Banque de France.

Echoing earlier German legal challenges to the ECB’s bond-buying programme, the memo said: “From an economic point of view, the ECB has already entered the territory of monetary financing of government spending, which is strictly prohibited by the [Maastricht] Treaty.”

It added that the “suspicion that behind this measure lies an intent to protect heavily indebted governments from a rise in interest rates is becoming increasingly well founded”.

The former central bankers also warned that negative interest rates would “favour owners of real assets” and “create serious social tensions”.

“The young generations consider themselves deprived of the opportunity to provide for their old age through safe interest-bearing investments,” they wrote. “The search for yield boosts artificially the price of assets to a level that ultimately threatens to result in an abrupt market correction or even in a deep crisis.”

While the memo said the ECB’s unconventional monetary policy helped to overcome a severe recession after the 2008 financial crisis, it warned: “The longer the ultra-low or negative interest rate policy and liquidity flooding of markets continue, the greater the potential for a setback.

“Like other central banks the ECB is threatened with the end of its control over the creation of money,” it said. “These developments imply a high risk for central bank independence — de jure or de facto.”

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