Yesterday I complained that the ECB learning curve was too flat. This summer – as in that of the two previous years – it has taken action to ease the crisis in response to rising fears of implosion. This time it offered “forward guidance” that rates would stay low (and the ECB would not follow the Fed in embarking on tighter policy). But at no point has it taken the decisive action needed to put the crisis behind us or – at the risk of mixing metaphors – to get ahead of the curve.
Of course, to speak of a “learning curve” when referring to a whole institution is a sort of poetic licence. In fact each of the constituent parts of that institution has its own state of knowledge, its favoured interpretation and its own interests. And so it is no surprise to learn from today’s SPIEGEL (auf deutsch) that the ECB’s governing Council is divided. More specifically, Bundesbank President Weidmann is apparently continuing his campaign to prevent the central bank from effectively acting to acting to bring about economic recovery. Monetary policy has already done more than it should. Instead:
efforts are needed on two fronts: structural reforms as well as the abolition of implicit guarantees for banks and sovereigns.
This time he was supported by central bank governors from the Netherlands and other countries (and on this occasion, apparently by Jörg Asmussen, the German member on the ECB board). Clearly, then, some elements in the ECB have learnt, but the central bank as an institution is being held back by those who are seeking to instrumentalise the crisis in order to get economic and social structures in member states that are more to their political taste. Talk about overreaching your mandate!
Where this approach leads is amply demonstrated by Japan. For years the central bank did too little to fight recession and deflation, insisting that “structural reforms” by the government were necessary. Japan’s depression continued while social inequalites rose, until late last year when Mr. Abe finally put the central bank in its place and ordered it to target a positive rate of inflation. So far the results have been impressive.
Axel Weber and Jürgen Stark, two former German decision-makers at the ECB with views similar to Weidmann’s, resigned in the course of the crisis. He is trying to play a smarter game, however. It is hard to judge whether he will continue to be successful in this. What is a safe bet is that as long as he, along with some allies, does wield power as a sort of blocking minority, Europe’s recovery will be much slower than necessary, unemployment higher and the social costs even more acute.