13 October 2019

Jean-Claude Trichet: Mario Draghi’s critics are misguided

Mario Draghi's predecessor at the helm of the ECB writes in the FT that he disagrees with the attack by six former central bankers on the loose monetary policy pursued by the bank. He says to see success, continuity, unprecedented challenges and a question about the limitations of monetary policy. 

[...]First, consider the successes. Since its inception in 1998, the ECB has delivered price stability (its primary treaty objective) significantly better than the best performing national central banks that preceded it. At the same time growth per capita was approximately the same as in the US.

Furthermore, the ECB had to cope with the worst financial crisis since the second world war. Thanks in particular to bold decisions taken after 2007 (including the full allotment of liquidity, securities market programme, outright monetary transactions and quantitative easing), resilience was assured. Since the start of the subprime crisis in 2007, seven more states have joined the eurozone’s 12 original members. 

Finally, popular support for the euro today is higher than ever. In a Eurobarometer survey in August of citizens in the eurozone, 76 per cent of respondents were in favour of the single currency. If these successes are not due to the actions of the ECB, who should get the credit? [...]

Where quantitative easing is concerned, it is not accurate to say, as the authors of the memorandum do, that there is a “broad consensus” that the policy is no longer having a positive impact on domestic demand. On interest rates, there are no empirical estimates to suggest that the ECB is at the point where the adverse consequences of negative values clearly outweigh the positives. And most studies suggest that inflation and real growth have been significantly higher than in the counterfactual scenario over the past few years. 

But the present situation cannot last for ever. The ECB has fulfilled its obligations, but monetary policy cannot always be the only game in town. [...]

To the extent that economies that are lacking cost competitiveness and still have mass unemployment cannot afford to lose additional cost competitiveness, inflation in the highly competitive countries is the abnormally low ceiling for inflation in other countries. 

So in order to relieve the burden on the ECB, the following measures are essential: fiscal action in countries with the requisite room for manoeuvre; structural reforms by all members of the single currency; and more dynamic wage growth in the full-employment economies.

Attacks on the ECB’s monetary policy are misguided. The energy would be better spent calling on EU institutions, national governments, parliaments and social partners to fulfil their obligations.

Full letter on Financial Times (subscription required)

 

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