WHAT A DEVIL´S ADVOCATE WOULD TELL ECB HAWKS / THE FINANCIAL TIMES OP EDITORIAL

What a devil’s advocate would tell ECB hawks

Their commitment to price stability requires them to back Draghi’s stimulus plans

Martin Sandbu




Since the early summer, Mario Draghi and his allies among the European Central Bank top brass have been laying the groundwork for new stimulus. Until recently, markets expected a punchy monetary package from this week’s ECB meeting, but hawkish talk from other central bankers in the last few weeks has muddied the picture.

In the disagreement within the ECB on what the economy needs, the doves have the better case, not least because the eurozone has only faced one of the three trade shocks about to hit it. But there is another reason why the hawks should rally behind the bank’s president this time round: it is in their own professed interest to do so.

Monetary hawks often see themselves as guardians of orthodoxy. So let them take inspiration from a much older bastion of orthodox thinking: the Vatican, which admits an advocatus diaboli to oppose the canonisation of putative saints. The analogy is not as far-fetched as all that: Bundesbank president Jens Weidmann has cited Mephistopheles’ alluring call for money-printing in a warning against it. In that spirit, here is how a monetary devil’s advocate might address the hawks at the ECB.

“Esteemed central bankers, let us leave aside the Keynesian arguments for countercyclical policy. Allow me instead to show how your own most cherished principles mean you must support a strong stimulus this week.

First, you rightly pride yourself on taking seriously the ECB’s legal mandate to protect price stability. But that is precisely what the ECB has been failing to do, despite the unprecedented measures taken in the last few years, sometimes against your advice.

Since January 2013, eurozone prices have gone up by only about 1 per cent a year on average. In those 80 months, inflation has only come in at 2 per cent or more four times. Strip out energy, largely driven by global developments, and inflation has not touched 2 per cent for more than a decade.

Your own definition of price stability is that prices should be rising stably at a rate just under 2 per cent per year. You may have preferred one or zero, but that is the rule which you are asking the public to rely on. The eurozone price level is 7 per cent lower today than those who trusted the ECB expected in early 2013. This is not stability, but a downward instability that distorts the decisions of businesses and households who need to know where prices are headed to plan.

Second, you worry about your countries’ savers. There are many of them, because as a hawk, you are likely to come from an economy that saves more than it spends or invests, and exports its surplus savings elsewhere. Those savers complain about the low returns on keeping their money in the bank.

But the downward drift of prices from your target has hurt borrowers, not savers. A lower-than-intended price level makes repaying loans more expensive than expected in real terms. The savers who ultimately provided the loans have been left with an unearned windfall, courtesy of you. Besides, you are guardians of price stability for the whole economy, not just those with money in the bank.

Third, you think that easy monetary policy makes for government profligacy. In a narrow sense, you feel central bank purchases of government bonds are a form of legally dubious ‘monetary financing’. But as someone who cares about the legal rules, you should defer to the judges. The EU court has accepted ECB bond purchases in proportion to its monetary policy needs. That is the law.

More broadly, you worry that loose monetary policy erodes fiscal morality. When financing is cheap, the pressure is off to streamline the public sector and make the hard choices that improve growth in the long run, you think. This is not the time to rehash the experience with austerity in the eurozone. Instead, consider whether ‘virtuous’ budget restraint is really what you want.

Back home, you may find a media and political debate that rails against incontinent spending in other countries. But it also rails against the effects of loose monetary policy. In your wisdom, you know perfectly well they cannot have it both ways. It is because public budgets have contributed nothing to aggregate demand since the crisis that the ECB has had to take the steps you dislike. It is an excess of public virtue that has led to the punishment of individual savers — and, let me add, returned you to the uncomfortable position of participating in monetary loosening once again.

So why not make your own job easier by pushing for more deficit spending by eurozone governments? At home, you can burnish your hawkish credentials by explaining that you would love to see higher rates, and for that to happen (given your legal mandate) governments must spend more or tax less.

In the eurozone institutions, you can lend your weight to the growing debate for a looser fiscal stance. When a new president takes the helm, one of her first tasks will be to put the ECB’s authority behind a push for more active fiscal policy. If your qualms about loose money are genuine, the best you can do is support her. Your hawkish credentials will make that support count for more than more predictable voices.

You dislike the tools by which the ECB engineers a loosening. But your respect for the law, concern for savers and your distaste for loose money are all best satisfied by supporting monetary stimulus today and fiscal stimulus tomorrow.

With that, I rest my case.”