The one good thing about the rising levels of frustration in Europe over the crisis, is that the public debate is being enriched with voices whose message might actually make a difference for the better. Today, a group of leading German economists has decided to speak up against the lax monetary policies of the ECB. This is a welcome contribution, but their contribution would be stronger and more to the point if they also learned a thing or two about what has actually brought Europe into the macroeconomic ditch.
Reports Benjamin Fox for the EU Observer:
The European Central Bank’s (ECB) plans to pump more cheap credit into banks risk undermining the long-term health of the eurozone, according to Germany’s leading economic expert group. The ECB’s “extensive quantitative easing measures” posed “risks for long-term economic growth in the euro area, not least by dampening the member states’ willingness to implement reforms and consolidate their public finances”, the German Council of Economic Experts (GCEE) said in its annual report, published on Wednesday (12 November).
That monetary expansion is indeed a problem. In September 2014 the M1 money supply in the euro zone had grown by 6.5 percent over September 2013. Over the past 12 months the annual growth rate has averaged 5.86 percent, showing that monetary expansion in the euro zone is actually increasing. In fact, adjusted for the large expansions in M1 euro supply that resulted from an expansion of the monetary union, the current expansion rate appears to be the highest in the history of the euro (though that is just a preliminary observation – I am not completely done with the simulation).
If current-price GDP was growing at the same rate, then all the new money supply would be absorbed by transactions demand for money. But the euro-zone GDP is practically standing still, which means that all the new money supply is directed into the financial sector (theoretically known as “speculative demand for money”). That is where the real danger is in this situation.
Unfortunately, the German economists are not primarily worried that the ECB is destabilizing the European financial system. Their concern is instead that lax monetary policy discourages fiscal discipline among euro-zone governments. They appear to be stuck in the state of misinformation where budget deficits are keeping the euro-zone economy from recovering.
Benjamin Fox again:
The Bundesbank is also uncomfortable about the ECB’s increasingly activist role in the bond and securities markets. … But the German call for the Frankfurt-based bank to limit its intervention remains a minority position. Most governments in and outside the eurozone, together with the International Monetary Fund, want the ECB to provide increased monetary stimulus. Last week the Organisation for Economic Co-operation and Development (OECD) also urged the bank to “employ all monetary, fiscal and structural reform policies at their disposal” to stimulate growth in the currency bloc, including a “commitment to sizeable asset purchases (“quantitative easing”) until inflation is back on track”.
Can any economist at the ECB, the IMF or the OECD please explain how the ECB’s money pumping is going to create inflation in any other way than the traditional monetary kind? Nothing in either my academic training as an economist or my 14 years of practicing economics as a Ph.D. gives me the slightest clue how this is supposed to work.
In fact, the only inflation I can see coming out of this would be strictly monetary – and that is not what anyone in Europe wants. Monetary inflation, unlike inflation caused by rising economic activity, can run amok deep into the double digits, as it has in Argentina and Venezuela.
It is good that leading German economists are worried about the ECB’s activities. Time now for them to take the next step and study the true structure of the economic crisis.