ECB needs to get a grip and buy bonds
He should stop listening to Europe’s scolds and do the right thing.
Ben Bernanke, the former chairman of the US Federal Reserve, has reminded us that, in November 2010, German finance minister Wolfgang Schäuble described US monetary policy as “clueless”.
The Fed had decided to step up purchases of Treasury securities to help lower long-term interest rates, in an effort to ward off a small risk of debilitating deflation.
Mr Schäuble described the move as a “sly” effort to weaken the dollar, apparently forgetting how an undervalued euro was boosting Germany’s trade surplus and weakening global growth.
Mr Schäuble’s intemperate language illustrates a mindset that is blocking debate of European policy priorities and the economic myths that sustain them.
The groupthink was evident as early as 2008, when the financial crisis rendered banks on both sides of the Atlantic desperately in need of capital and short-term loans.
Joaquin Almunia, the European Commissioner for Monetary Affairs, portrayed it as a US problem. Jean-Claude Juncker, who headed the group of eurozone finance ministers, was more belligerent: “We have to be concerned, but a lot less than the Americans, on whom the deficiencies against which we have warned repeatedly are taking bitter revenge.”
European thinking proved disastrously wrong. Mr Bernanke points out that US GDP is 8.9% above its pre-crisis level, while eurozone GDP remains 0.8% below.
In contrast, European authorities have wallowed in denial. In mid-2010, when asked about the dangers of deflation, the ECB’s then-president Jean-Claude Trichet said: “I don’t think that such risks could materialise.”
The ECB finally followed the Fed with its own securities purchase programme in January 2015. But delays and half-measures have been costly.
Greece and Spain are already in deflationary territory, and Italy is ready to fall into the same trap. Because deflation reduces nominal income while leaving debts untouched, it will make debt burdens much harder to bear.
Pre-emptive economic policy — one that acts before risks unfold — requires sound judgment and institutional capability.
The great risk is that eight years into the crisis, the Europeans have learned no lessons in macroeconomic risk management, and will remain behind the curve.
At its policy-making meeting later this week, the ECB has another chance to lead rather than follow, by expanding its bond-buying programme. If it fails, we’ll know who really is clueless.
