German disapproval of the European Central Bank’s monetary policy has grown steadily in recent years. Critics say the policy only takes into consideration the interests of crisis-hit countries in the euro zone. They argue it hurts Germany because it redistributes risks and is too expansive for Europe’s best-performing economy.
The criticism exploits the old anti-European resentment: “What’s good for Europe must be bad for Germany.” But the latest numbers on the German economy should force critics to reconsider – because an expansive monetary policy is definitely in Germany’s best interest.
Many of the unconventional measures by the central bank are designed to relieve the ongoing credit crunch in southern Europe. But by helping Greece, Italy and Portugal, for instance, they indirectly boost Germany’s growth by increasing demand and promoting stability.
But Germany also profits directly from the ECB’s monetary policy. The measures reduce the likelihood of a weaker German economy – which contracted 0.2 percent from the first to second quarter – and the very real danger of deflation. It’s wrong to argue for a monetary policy that would set higher interest rates. At 0.8 percent, the rate of inflation in Germany is much too low, and will certainly remain so for the mid-term. Overall, the German economy is still growing, but it could grow faster under the right conditions – including low interest rates.
It’s true that the European Central Bank’s monetary policy carries considerable risks and not all of its measures have succeeded. It is legitimate to worry about higher costs for German savers. But these are not a consequence of monetary policy. They come from a deeper economic crisis in Europe that is being combatted by this very same strategy.
It’s also true that the generous loans to European banks can lead to bubbles in asset prices and misallocations. Central bankers must take this risk far more seriously than they have in the past. At the same time, however, not every rise in asset price is negative. Real estate prices are rising because many German savers are buying their own homes. In principle, this is a good thing because it increases homeowners’ wealth.
German criticism of monetary policy by the European Central Bank ignores the risks that come with deflation and stagnation.
Since 2007, low interest rates have saved the German government€120 billion, or $159 billion, according to the German central bank. In this way, the expansive monetary policy not only buys crisis countries time for reform, but also allows the German government to finance public expenditures without raising taxes. Admittedly, it’s not the task of monetary policy to guarantee favorable financial conditions for individual countries. But in the short term, an even deeper crisis in Europe has been avoided.
Every central banker must think and like a risk manager. The crucial question for the European Central Bank is not whether its monetary policy is appropriate for Germany. Instead it must ask how much weight it gives to short-term versus long-term risks to price stability, economic growth and financial stability. As economist and former German central banker Axel Weber correctly argued in an interview with Handelsblatt last week, the monetary authorities should be most concerned with long-term risks to financial stability.
The short-term risks of a deeper financial crisis in Europe are of course enormous today. Protagonists in the financial markets as well as entrepreneurs are less confident of the central bank’s ability to guarantee price stability in the 18 countries that use the euro. So the bank must continue to take action – not only to meet its mandate, but also to defend its credibility.
German criticism of monetary policy by the European Central Bank ignores the risks that come with deflation and stagnation. The new figures for GDP and inflation in Germany should serve as a wake-up call for critics to engage in a more open, pragmatic commitment to Europe.
The German economy profits from the expansive monetary policy. These measures mean more growth and stability, and hence more prosperity for Germany – both short-term and long-term.
Marcel Fratzscher can be reached at email@example.com