Modern Monetary Theory Is Getting No Love From ECB Policy Makers

(Bloomberg) -- Benoit Coeure added his voice to the European Central Bank’s skepticism about Modern Monetary Theory and its alternative views on fiscal spending.

The Frenchman, a member of the ECB’s Executive Board, told students in Milan on Wednesday evening that MMT is “a theory of fiscal dominance” that runs counter to the kind of “monetary dominance” practiced in Europe.

“It’s a good discussion to have because it challenges the traditional way of looking at fiscal and monetary policy,” Coeure said. “But I think there are severe limitations to the assumptions.”

Europe’s legal framework is built on the separation between fiscal and monetary policies, a decision taken by European citizens that “we’re not going to change,” he said, adding that MMT was full of “U.S. biases.”

MMT has been touted by prominent economists and politicians in the U.S. as a way to boost social spending without worrying so much about a large deficit. Followers argue that countries with their own central banks who borrow in their own currencies needn’t be concerned about overspending because they can’t go broke. They also point to years of low inflation in major advanced economies.

The idea doesn’t apply neatly to the euro area because there’s only one central bank setting monetary policy for 19 member states with independent fiscal policies.

Coeure said the argument that there’s no need to worry about excessive spending isn’t “true in the real world because eventually there will be inflation.” People would also start abandoning their currency once they realize the government is running unsustainable policies. That “sets the limit on how much you can print or issue.”

Coeure, who’s in the running to succeed ECB President Mario Draghi, pointed out the perils of discussing the theory in public: “Whatever you say on MMT, you start being trolled on Twitter -- so you have to be prepared for that.”

ECB chief economist Peter Praet got into hot water with MMT enthusiasts on Tuesday, when he called the idea that government debt can be financed by central banks a “dangerous proposition.”

To contact the reporters on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net;Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow, Zoe Schneeweiss

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