Former Draghi Lieutenant Appeals for Calm in ECB Stimulus Row
Former European Central Bank Chief Economist Peter Praet appealed for calm in an increasingly bitter row over monetary policy that threatens to mar President Mario Draghi’s final weeks in office.
Responding to criticism last week of ECB policy by his predecessors and a group of former policy makers, Praet said the memorandum they signed lambasting the institution’s efforts to stoke inflation was emotional and employed straw-man arguments. While recognizing their concern as genuine, he argued it would be better-addressed in a proper discussion.
“I can understand the frustration, but people should keep quiet, be calm,” Praet, one of Draghi’s most trusted lieutenants until he left the Executive Board in May, told Bloomberg in an interview. “This sort of noise at the end of the mandate is not helpful.”
The memorandum criticized the ECB’s approach to complying with its price-stability mandate, raised alarm over the longer-term impact of negative interest rates and alleged the institution is financing governments with its bond-buying program -- a move that’s forbidden by European Union law.
It was signed by two of the ECB’s prior chief economists, Otmar Issing and Juergen Stark, as well as former policy makers from France, Austria and the Netherlands, who held predominantly hawkish views during their time in office.
Their declaration adds to a growing push-back against loose monetary policy championed by Draghi as he approaches the end of his term on Oct. 31. Last month’s decision to restart quantitative easing was opposed by policy makers from countries totaling more than half of the euro zone by population, and many officials have aired frustration in public since then.
The criticism brought forward by past and present policy makers shares some common traits, according to Praet, who has spent most of his eight years at the ECB designing and implementing non-standard measures.
“The way these former central bankers express themselves -- sometimes in not so well-chosen words and about policies that have yet to be decided -- shows some deep malaise in the central-banking community,” he said.
Praet suggested the recent iteration of the ECB’s guidance on the direction of borrowing costs, which effectively locks in negative rates for years to come, may have rattled some officials. During his term, the Belgian often argued for spelling out the time frame for loose policy.
“The open-ended character of the forward guidance has made many very anxious,” he said. “The unconventional measures were previously viewed as relatively temporary. Now they are likely to stay in place for a very long period of time with possibly increasing adverse side effects.”
Praet said the discussion essentially comes down to the question of how central banks should react to shocks that undermine business confidence, but have their origins abroad -- like Britain’s exit from the EU, trade tensions and growing protectionism.
“Central banks need to do their duty in trying to stabilize the economy,” he said. “Yet given the nature of these shocks, monetary policy probably won’t be a sufficient response.”
Echoing Draghi’s call for euro-area governments to step up spending, Praet said the region’s economy needs a fiscal expansion to spark animal spirits. “That means some form of coordinated policy response, which is of course difficult and controversial.”
©2019 Bloomberg L.P.