The “E” in ECB stands, lest it be forgotten, for “European”. It is the central bank of all the countries belonging to the Euro Area. It is also thanks to the Treaty and its own statutes independent of instruction from European and national public bodies. This does not prevent national lobbyists, commentators and politicians from giving it unsolicited advice, however, particularly when ECB policies are perceived to be out of line with the real or supposed “national interest”, or that of the social group in question.
Germany is something of a special case in this regard, for a number of reasons. It is the EU country most clearly associated with inflation-hawkism and, related to that, upholding the idea of central bank independence. It is the largest Euro Area economy. In theory this makes it less likely that its economic needs will differ widely from those of the currency area as a whole, creating pressure to seek changes in the monetary policy stance. Yet, in practice Germany has been something of a Euro Area outlier. It would have needed lower interest rates for much of the pre-crisis EMU period and would not, by itself, require the extraordinary expansionary measures pursued recently by the ECB. Lastly, its size, economic performance and the nature of the euro crisis mean that Berlin very much calls the policymaking shots in the EU as a whole.
It is against this background that we should reflect on reports that Chancellor Merkel is today meeting Mario Draghi and has been urged by party officials, Bundesbank president Weidmann and lobbyists from the German financial sector to – how to put this delicately? – persuade the ECB president to bring low interest rates and quantitative easing to an end sooner rather than later. There is nothing, in principle, wrong with concerned parties expressing their opinions and asking an elected official, even the federal Chancellor, to put them across. The worry is that Merkel will not leave it to the mere force of intellectual argument, but seek in various ways to exert pressure on the ECB. This concern seems all the more valid given the threadbare and hypocritical nature of the arguments for a change in the monetary stance.
For the mandate of the ECB is very clear that any other concerns – such as the profitability of German savings banks or real estate prices in certain German cities – are secondary to the task of ensuring price stability, which is defined as below but close to 2% in the medium term. Yet it is three long years since headline (HICP) inflation was last at 2%. For more than a year it has been bouncing around the zero mark. And core inflation (stripping out energy and unprocessed food) has been locked in at a full percentage point below the ECB target, despite the low interest policy and, since the start of 2015, a substantial quantitative easing (QE) policy. In short, there is no legal-economic case at all for withdrawing monetary stimulus. On the contrary, the ECB has persistently failed to achieve its mandate “from below”, for such an extended time and to such an extent that serious doubts about the validity of the target have emerged. This calls for an intensification of stimulus (and, arguably, a change in its focus).
Under current circumstances it would be a disaster were Draghi to give in to such special pleading. This much is obvious. There is a deeper point, however. For monetary policy is not the only way to stimulate nominal and real output. Expansionary fiscal policy would do the trick! Even under the restrictive (and perverse) European rules and its own national “debt brake”, Germany has the space to provide fiscal stimulus. This would boost demand in the country itself and also in the Euro Area as a whole, pushing up the rate of inflation towards the ECB target. This would bring forward the time at which the ECB could, while respecting its mandate, start to reduce monetary stimulus.
Ironically, then, German policymakers and lobbyists seem to be gulty of the same misdemeanour for which they criticise those in other countries: failing to “do the right thing” in terms of domestic policy and instead piling pressure on the ECB to do their work for them. Germany should do its fiscal policy homework, boost investment in its delapidated public infrastructure – and lay off the ECB.