Attacks on the European Central Bank in Germany have become more strident and intense in recent weeks. There is no doubt that the monetary policy of the ECB, whose eagerly awaited council meeting takes place this week, comes with risks. But those risks must be weighed against the benefits of the policy.
Still, the highly emotionalized and to some extent completely erroneous criticism is dangerous and counterproductive, because it makes something we Germans are trying to avoid all the more likely – the ECB’s purchase of government bonds.
The mildest critics of the ECB argue that the central bank’s program to purchase asset-backed securities (ABS) is not very effective. It’s an accurate criticism, because the program will likely only moderately improve lending on the part of banks. Countries like Spain face unemployment rates upwards of 25 percent and youth unemployment above 50 percent. Any loan that enables businesses to invest and create employment is a success and helps to overcome the crisis.
Probably the sharpest criticism of the ECB is that the ABS purchasing program transforms the central bank into a “bad bank,” which is buying “junk bonds,” thereby transferring the banks’ risks to German taxpayers. This criticism is not only fundamentally incorrect, but it also constitutes irresponsible fear mongering. For one thing, ABSs are relatively safe bonds. Only 0.1 percent of all ABSs have gone into default since 2009. Second, the ECB is only buying the safest tranches of these securities, so that they would be disbursed first in a default. Third, the ECB is taking the risk of an ABS note into account in determining its purchase price.
A serious criticism of the ABS purchasing program is that it makes it easier for ailing banks to survive, creating a potential conflict of interest for the ECB between its geopolitical mandate and its new role in supervising banks. In the coming years, it will be up to the ECB to belie this concern by pursuing a credible and consistent course with its monetary policy.
The most cynical criticism is that the ECB should not buy any ABS notes because this could tempt the governments of crisis-ridden countries to implement too few reforms. The loudest proponents of this idea are those who rejected last year’s ECB Outright Monetary Transactions (OMT) program in sovereign bond markets with the argument that the ECB should concentrate on its primary mandate of maintaining price stability. They argue that the OMT program is not a tool of monetary policy but of economic policy. Now that the ECB is falling short of its price stability mandate by a long shot (price development in the euro zone is almost in the deflationary zone and will likely remain there in the medium term), these critics are now demanding that the ECB ignore its mandate of maintaining price stability and take on an economic policy role by making the potentially stimulating effects of its monetary policy a priority.
The ECB cannot be misused for the purpose of assuming the role of the European community of nations and forcing individual national governments to institute reforms.
Even worse, the emotionalism and lack of factual basis of the ECB criticism in Germany is counterproductive and harmful. All of us – including the ECB itself – want to avoid the acquisition of sovereign debt by the ECB if at all possible. The central bank has instituted new monetary policy measures in recent months, precisely to avoid having to purchase government bonds. And this is exactly the reason it should be in everyone’s interest that the ABS program and other ECB measures are successful.
The monetary policy of the ECB undoubtedly entails risks. Most of all, it contributes to disincentives for governments and banks. But the ECB must concentrate on its mandate of maintaining price stability, which is currently missing by a long shot. The severity and lack of objectivity of the criticism in Germany is dangerous and counterproductive. It could destroy the fragile confidence among financial markets and investors, derail the current ECB measures and ultimately force the central bank to purchase sovereign debt. For that reason, it is imperative that we resume an objective dialogue about the ECB and its monetary policy.
Marcel Fratzscher is president of the German Institute for Economic Research (DIW). He can be reached at: firstname.lastname@example.org.