THE EURO´S GUARDIANS FACE A ROAR OF THE DINOSAURS / THE FINANCIAL TIMES EDITORIAL

The euro’s guardians face a roar of the dinosaurs

The true risk to the eurozone economy is overly tight, not loose, monetary policy

The editorial board


Helmut Schlesinger, the former Bundesbank head, is one of the signatories of a memo attacking the European Central Bank © DPA


The attack on the European Central Bank’s renewed stimulus by six former central bankers is extraordinary. Already, the ECB had been publicly criticised in unusually sharp terms by dissenters on its own governing council and leading German financial executives. }

But the new critics, in a memo published on Friday, include some of the grandest names in central banking, such as Helmut Schlesinger, the 95-year-old former Bundesbank head, and Otmar Issing, an ECB board member when the euro came into being.

Only one thing can match the stature of the complainants and that is the hollowness of their complaint. Their memorandum reveals them as the Bourbons of central banking: they have learnt nothing and forgotten nothing.

They think monetary accommodation has damaged the financial sector, turned banks and companies into zombies, and increased the risk of financial instability. But if the history of the euro and global economic evidence demonstrate anything it is that the true risk both to the eurozone economy and to the ECB’s mandate is a policy that is too tight, not one that is excessively loose.

The memo disregards the fact that the last time monetary policy was tightened in the eurozone it helped tip the economy into a second recession, and unchained deflationary pressures that were only reined in by a belated programme of quantitative easing. Other central banks, which loosened earlier and more ambitiously than the ECB, saw uninterrupted recoveries.

The memo ignores the fact that low rates are a global phenomenon, as is the latest slowdown.

From Japan to the UK, central banks are keeping policy rates at historic lows. The Federal Reserve has reversed its tightening and thinks it may have gone too far in selling off bonds bought in quantitative easing. If the signatories are right, it is not just the ECB but the entire outside world that is mistaken.

Behind a veneer of economic and legal argument lies a partisan attack. The memo is unconvincing in light of the ECB’s mandate to support all-eurozone price stability and the EU’s other economic objectives. It makes more sense as a camouflaged fight for the interests of savers against those of borrowers. Only one signatory is not from the big net saving economies of Germany, Austria and the Netherlands, and the memo all but accuses the ECB of violating EU law to “protect heavily indebted governments”.

Particularly revealing is the complaint that loose monetary policy favours “real assets” and deprives the young of “safe interest-bearing investments”. Rates are low because too many seek riskless savings and too few want to invest in “real assets” — also known as productive capital. If bank deposits do not pay the returns they once did, the fault is not that of central banks but of market realities. Holding back demand with tighter money can only make things worse.

If they really wanted higher rates, the critics would support the ECB’s call for fiscal expansion to relieve monetary policy. Instead their hard money dogma reflects a deeper disagreement that predates the euro, over whether Europe is governed in Germany’s image or Germany in Europe’s. Wolfgang Schäuble infamously blamed low ECB rates for the growth of the far-right Alternative for Germany. In fact the populist party’s origins lie in the sort of hard money lobbying for savers’ interest that the memo represents — never mind that the ECB has kept inflation lower than the Bundesbank.

The memo expresses a generation’s frustration that its ideas lost influence. Today’s Europe — especially its youth — may be fortunate that they did.