Leading private sector economists have hit out at the strategy of the European Central Bank, calling for incoming president Christine Lagarde to undertake a fundamental review of monetary policy when she takes charge later this year.
The ECB has dropped some of its key interest rates to -0.5% and has been clear in stating that they will remain in negative territory until there are signs of growth in inflation. But economists are keen to see some soul-searching at the top levels of the eurozone’s central bank.
Erik Nielsen, global chief economist at UniCredit, told GlobalMarkets he was hopeful that Lagarde, who replaces Mario Draghi as ECB president in November, would launch a full review of the central bank’s strategy.
“I would love a real review of policy,” he said highlighting the relationship between the level of unemployment and the rate of inflation. “Do they really think the Phillips curve is flat and there is nothing wrong with what they are doing?
“If that is the case, why didn’t they push the pedal to the metal earlier? They really need to be asking themselves these types of questions. Today the financial system remains on life support because of low or negative rates. How long can that last?”
“Something has to change at some point,” said Elwin de Groot, chief international economist and eurozone strategist at Rabobank. “We are not big fans of [quantitative easing]. It has a lot of side effects and could be negative for growth in the long term.”
Fiscal policy
The economists said they had sympathy for the position of the ECB, which they argued was not able to influence growth and inflation by itself.
They said that eurozone member states had to play their part by boosting public investment, with countries like Germany standing in the strongest position to loosen their stance on fiscal policy.
“The ECB needs help,” said UniCredit’s Nielsen. “Monetary policy cannot be the only game in town.”
“Governments were the number one economic agents in the economy benefitting directly from quantitative easing, but they ended up using the opportunity to save money instead of investing it,” he added. “That cannot be right.”
Phillip Lane, chief economist at the ECB, struck a slightly different tone in a talk at The Brookings Institution in Washington yesterday. He said that finance ministers could help spur growth in Europe by loosening their stance on fiscal policy, but he insisted that the ECB stimulus was having a positive impact.
“Inflation remains on an upward path,” Lane said. “I don’t really see this idea that we are trapped. We have momentum in the economy. The ECB has been quite creative in pushing the boundary of monetary policy and we don’t think we are done yet.”