PARIS – In Northern Europe, especially Germany, the European Central Bank’s decision to embark on quantitative easing (QE) has triggered an avalanche of indictments. Many are unfounded or even baseless. Some are confusing. Others give greater weight to speculative dangers than to actual ones. And few point to real problems, while ignoring potential solutions.
Judging by the criticism, one might consider zero inflation a blessing. But if that were true, central banks around the world would have set it as a target long ago. Instead, all of them define price stability as low, stable, but positive inflation.
That is because zero inflation has three overwhelmingly negative consequences. First, it erodes the effectiveness of standard monetary policy (because if interest rates went much below zero, depositors would withdraw cash from banks and put it in safes). Second, it makes relative wages (of, say, manufacturing versus services employees) more rigid, because wage contracts are generally set in euro terms. And, third, it increases the burden of past debts and makes exiting from a private or public debt crisis even more painful.
But, say the critics, there is no reason to worry, because the eurozone’s near-zero inflation is merely the result of the sharp drop in oil prices. Unfortunately, there is indeed plenty of reason to worry. Consumer price inflation in the eurozone has been below target for 22 consecutive months – long before the price of oil started collapsing. Cheaper oil is a boon for growth; but it also lowers long-term inflation expectations, which are the true target of monetary policy.
Then there is the critics’ claim that below-target inflation is needed to restore competitiveness. This is just confusing. It is true that rebalancing competitiveness within the eurozone has not yet been completed, and that some countries thus need to record below-average inflation to cut above-average costs. But this is not true of the eurozone as a whole. Eurozone-wide competitiveness depends on product quality and the euro exchange rate, which is flexible. Inflation is irrelevant in this respect.
Nonetheless, the ECB’s critics fear the sorcerer’s apprentice: monetary initiatives like QE will ultimately cause runaway inflation. This reasoning is strange, at best. If the critics’ point is that central banks make mistakes, it seems worth pointing out that the mistake made in the eurozone was to let inflation reach excessively low levels.
Now the ECB is reacting with force, but, as Japanese policymakers have found, exiting from deflation is far from easy. ECB President Mario Draghi may fail to bring inflation back to 2%. Or he may overshoot. Nobody knows. But it is odd to claim that a speculative danger should prevent the ECB from fighting one that is all too real.
Then comes the claim that QE is illegal. But the ECB’s primary responsibility is to achieve and maintain price stability. When conventional interest-rate policy becomes impotent, its duty is to rely on other instruments. The purchase of government bonds is explicitly authorized by the EU Treaty.
This is not to say that QE has no downside. It probably will create asset-price bubbles. Ultra-low interest rates lift asset prices in two ways: they increase the present value of the future income stream of a stock or a fixed-income bond; and they make credit and property purchases more affordable. So asset-price inflation is likely, and policymakers will have to contain it through regulatory tools, such as credit limits.
Moreover, QE probably will increase inequality. The rise in the price of stocks, bonds, and land will increase their owners’ wealth. Obviously, those without property will not benefit. But the ECB’s monetary initiative will also help reignite growth and create jobs, thereby benefiting the poor. It is governments’ task to address the rise in inequality resulting from QE, and they have an instrument for that: taxation.
When the United States Federal Reserve embarked on QE, it was accused of exporting its problems, because aggressive monetary easing inevitably weakens the currency. The same charge is now being leveled against the ECB. But this is misleading. Ultimately, the US recovery helped its trade partners more than it hurt them. In today’s world of global monetary interdependence, the rule of the game is that every currency union should pursue its own price stability. The ECB has not departed from this standard.
Another major concern in Germany is that QE could be a backdoor means of creating Eurobonds. But a Eurobond is a pact among issuers offering each other mutual guarantees. The ECB, however, is not an issuer; it is an independent agency, and the decision to buy is its own. Furthermore, 80% of the risk will be borne by national central banks individually.
Northern European opposition to Eurobonds reflects moral-hazard concerns that monetary activism will discourage structural reforms. But, in the current context of protracted stagnation, the TINA (there is no alternative) argument for reform is losing strength by the day. Absent a visible payoff, reform fatigue is setting in. The new policy mix should combine macro-level support and micro-level change.
The argument that QE will destroy fiscal discipline cannot be rejected out of hand, because both its proponents and its adversaries seem to agree that its days are over. But, though it is true that ECB bond purchases will shelter governments from market pressure, such pressure was already fairly ineffective. It is governments’ job to uphold their end of the bargain and ensure that they do not shirk their responsibilities. This is what the EU’s “fiscal compact” is for.
Finally, German critics complain that the ECB’s monetary policy is not geared to German economic conditions. This is both true and unavoidable. The ECB is responsible for the eurozone as a whole. Its monetary policy cannot be perfectly suited to all members’ needs all of the time. For the euro’s first ten years, the ECB’s policy was too lax for Spain; now it is too lax for Germany. The ECB should not be blamed for doing its job.
Jean Pisani-Ferry is a professor at the Hertie School of Governance in Berlin, and currently serves as the French government’s Commissioner-General for Policy Planning.
Copyright: Project Syndicate, 2015.