04 October 2019

Financial Times: 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. [...]

Full article on Financial Times (subscription required)

Editorial on the FT: The euro’s guardians face a roar of the dinosaurs

Full memorandum

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