“There cannot be any limit to how far we are willing to deploy our instruments, within our mandate,” Mario Draghi, president of the European Central Bank, has said repeatedly in the last few months. The message is clear: The European Central Bank is determined to take its policy even more deeply into unknown territory.
The limits of monetary policy were exceeded long ago, and it seems everything is now possible and permitted. The statement underpins the theory that there has been a paradigm shift in ECB monetary policy since 2011/2012. The current leadership of the ECB follows the neo-Keynesian paradigm.
The statement that the ECB is acting “within our mandate” has been mentioned in connection with every decision reached by the ECB’s governing council since 2010. But since 2011, it has proved to be implausible and is completely misleading. It is an advance justification for the ECB’s actions and it conceals true intentions and goals.
The ECB is ignoring the lack of effectiveness and increasingly discernible negative side effects of its policy. It is also negligently accepting as a necessary evil the public’s dwindling trust in the central bank and the euro.
This could still be corrected, even though that would lead to substantial market distortions. Instead, the ECB seems willing to continue the risky experiment with its policy of negative interest rates and to expand quantitative easing, or QE.
The ECB has long been operating beyond the mandate it was given by policymakers. Since 2010, partly of its own volition and partly yielding to external pressure, it has become a political player. It is practicing fiscal and economic policy with the instruments of its “unconventional monetary policy,” its Outright Monetary Transactions and the quantitative easing of monetary policy since 2015, including the massive purchases of government bonds and other securities.
'Positive' effects emphasized by the ECB are on the modest side and are out of proportion with the bloated central bank balance sheet and the negative consequences of its policies.
The ECB expects the inflation rate in the euro zone will be brought up to two percent again quickly. The newly-created liquidity should flow into the real economy through bank loans, and it should increase investment and growth. This would primarily benefit the countries on Europe’s periphery. The risk premiums on government bonds have been reduced, and the euro exchange rate has been pushed down.
Other “positive” effects emphasized by the ECB are on the modest side and are out of proportion with the bloated central bank balance sheet and the negative consequences of its policies. The effect of quantitative easing in the euro zone is also modest compared to the United States, because we are dealing with different channels of action here, and because interest rates are already at an extremely low level.
In the United States, quantitative easing primarily affected the stock market and through a wealth effect. This was and is not to be expected in Europe. The example of Japan also highlights the limits of the easing when surges of liquidity encounter rigid economic structures and markets.
In short, the instrument is unfit to correct the economic problems of the euro zone. Instead, the negative consequences of this policy are intensifying. Negative income effects, the acceptance of higher risks and the erosion of the earning power of banks are becoming more and more palpable, together with other “unintended consequences.”
It is true that the rate of inflation in the euro zone is very low and was slightly negative again recently. But the price level that has been reached is mainly a consequence of the sharp decline in the price of oil and is no justification for limitless action. The ECB is trying to compensate for the things national governments have failed to do. Social reforms and reforms to the market economy are urgently needed. They are the only way to achieve higher economic growth and more employment.
The ECB’s governing council should take the latest conclusion in the G20 communiqué to heart: “Monetary policy alone cannot lead to balanced growth.” Only those who are out of touch with reality and foist the responsibility for the consequences onto others can act without limitation.
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