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Several central bankers have been highly critical of the ECB's monetary policy. In a joint statement, six former central bankers, including Nout Wellink of the Dutch Central Bank, warn of the negative effects of loose monetary policy.
Not only do they criticize it decision of the central bank to buy government bonds again, they also believe that the central bank has deviated too far from the pursuit of price stability. They point to a number of negative effects of extremely low and negative interest rates, such as increasing inequality between rich and poor and the emergence of speculative bubbles in the economy.
Below you can see a translation of the text of the memorandum, which was signed by six former central bankers. The content was also endorsed by Jacques de Larosière, former governor of the French central bank. We've added subheadings to improve readability.
As former central bankers and as European citizens, we are witnessing with increasing concern the ECB's ongoing crisis. The ECB has pursued an extremely accommodative policy in exchange for years of economic growth and price stability. The recent slowdown in economic activity - which the central bank itself considers temporary - and risks stemming from Brexit and the trade war, have prompted the ECB to resume bond purchases and further reduce the already negative deposit rate. Moreover, the ECB has committed itself to this highly stimulative policy for a long time. Our concerns relate in particular to the following aspects of monetary policy.
In October 1998 the Governing Council announced its definition of price stability as an average annual increase in the price level for the euro area of less than 2 percent. The Governing Council did not change this definition at all in the review of its monetary policy strategy in 2003. In recent years, the ECB has de facto changed the original definition of price stability, considering an inflation rate of, for example, 1.5% to be unacceptable.
For years, the ECB has failed to meet its self-imposed target of raising euro area inflation to levels below, but close to, 2 percent, which appears to be a "point target" in the ECB's interpretation. The central bank essentially justified its extremely loose policy in 2014 by the threat of deflation. However, there has never been a danger of a deflationary spiral and the ECB itself has seen it less and less as a threat for some time. This weakens its logic to aim for higher inflation.
The ECB's monetary policy is therefore based on a misdiagnosis. The oft-used argument that the ECB is violating its mandate with low inflation rates is simply false. The Maastricht Treaty enshrined this mandate, namely that the primary objective of the ECB is to maintain price stability.
The current considerations on defining a 2% threshold as a symmetric inflation target represent a clear departure from a policy aimed at price stability. This is particularly the case if "symmetry" is understood in the sense that, after years of falling below the 2 percent mark, a comparable period must be spent that allows inflation to exceed 2 percent. And after years of unsuccessful "inflationary policies," how does the ECB intend to convince the public and markets that it will succeed in stopping inflation at some level in time?
There is a broad consensus that, after years of quantitative easing, a continuation of the ECB's bond purchases will have little positive impact on growth. This makes it difficult to understand the logic of monetary policy to resume the bond-buying program. The suspicion that behind this measure lies an intention to protect heavily indebted governments against a rise in interest rates is becoming increasingly well-founded. From an economic point of view, the ECB has already entered the field of monetary financing of public expenditure, which is strictly prohibited by the treaty.
Negative side effects of very low or negative central bank interest rates have been a problem for quite some time. Meanwhile, these effects dominate as emphasized in the theory of inverse interest rates, reversing and contradicting the intended effect of very low interest rates. The negative impact of an extremely low interest rate environment extends from the banking system through insurance companies and pension funds to the entire financial sector.
The redistributive effects in favor of owners of tangible assets cause serious social tensions. The younger generations see themselves deprived of the opportunity to take care of their old age with safe interest-bearing investments. The search for yield artificially inflates the price of assets to a level that ultimately threatens to result in an abrupt market correction or even a deep crisis.
Extensive loans at extremely low interest rates prop up weak banks and – indirectly through their loans – weak businesses. This is achieved in particular through targeted long-term refinancing operations (TLTROs), which increased significantly in 2018. The significant negative effects of very low or negative interest rates also include a 'zombification' of the economy, which, according to studies by the OECD and the BIS, has already reached significant levels in some countries, thus contributing to weaker productivity growth. By 'Forward guidance' In order to expand and further strengthen the ECB, the ECB is firmly committed to an extremely accommodative future monetary policy, which significantly hampers the exit from such a policy.
Ten years ago, the ECB's monetary policy made a significant contribution to overcoming the severe recession and consolidating growth thereafter. However, the longer the ECB stays on this extremely accommodative path, the more the negative effects will dominate. Interest rates have lost their steering function and risks to financial stability have increased. The longer the policy of extremely low or negative interest rates and flooding the markets with liquidity continues, the greater the potential for a setback.
Should a major crisis strike, it will be of a very different dimension than the one we have seen before. Like other central banks, the ECB is threatened with the end of its control over money creation. These developments imply a high risk to the independence of the central bank, de jure or de facto.
Hervé Hannoun, former First Deputy Governor of the Bank of France
Otmar Issing, former member of the Executive Board of the ECB
Klaus Liebscher, former governor of the Austrian central bank
Helmut Schlesinger, former President of the German Bundesbank
Juergen Stark, former member of the Executive Board of the ECB
Nout Wellink, former governor of the Dutch central bank
