I recently had the great fortune to listen to a speech delivered by Mr Yves Mersch, Member of the Executive Board of the European Central Bank. This was in Athens on November 8 at the first Minsky Conference in Greece organized by the Levy Economics Institute. The title of the conference was “The Eurozone crisis, Greece, and the Austerity Experience”. The conference was well attended by the interested public. As is typical of Minsky conferences as annually held in the United States, it brought together academic scholars, financial market practitioners, journalists, as well as policymakers, including Mr. Mersch, whose speech was titled “Intergenerational justice in times of sovereign debt crises” (see here). Mr Mersch played part in the negotiations of the Maastricht Treaty and has served as the Governor of the Central Bank of Luxembourg since its formation in 1998, before joining the ECB’s Executive Board last year.
Apart from lauding Greece’s pension reforms as measures that were necessary in view of demographic trends, Mr Mersch hailed Greece’s achievements in closing its fiscal deficit as “remarkable”, describing the Greek austerity experience as a “fiscal adjustment of historic proportions”. That it truly was and Mr Mersch was keen to emphasize that the “extraordinary efforts” undertaken by the Greek people refuted the naysayers and proved wrong prophetic claims heard in May 2010 that Greece would leave the euro area within months. Mr Mersch acknowledged that record-high unemployment was a “tragedy”, only to go on to assert that “this is the painful cost of reversing the misguided economic policies and lack of reforms in the past”.
And, of course, more of the same would be needed, according to Mr Mersch: more fiscal consolidation, more structural reforms, and lower wages and prices in order to increase external competitiveness and facilitate an export-led recovery as Greece’s “external sector must go into surplus”. This may be painful, “but we are in a monetary union and this is how adjustment works”. In addition to more wage-price deflation Mr Mersch singled out the need to restore the health of Greek banks and the need for attracting more foreign investment as the other key ingredients that would deliver adjustment and recovery in Greece.
During the Q&A session following his speech I asked Mr Mersch whether there might not be a conflict between, on the one hand, emphasizing the need of healthy banks that would fund the recovery and, on the other hand, prescribing more wage-price deflation. Since a deflationary environment was not exactly known as a factor that would tend to improve the health of banks. And I also asked him why the ECB was tolerating such a significant undershooting of its two-percent stability norm while calling for even more wage-price deflation in crisis countries – instead of going for higher inflation in current account surplus countries such as Germany. At least to me it seemed obvious that a properly stability-oriented central bank should much prefer inflation in surplus countries to be sufficiently high so as to enable the bank to actually meet its mandate, that is, two percent HICP inflation on average across the currency union, over an outcome where even Germany has an inflation rate that is well below two percent, with the ECB ending up sharply missing its self-defined target in the downward direction.
Mindless austerity or stability-oriented austerity?
Mr Mersch’s answers were very interesting. For one thing, he avoided answering my first question on the health effects of deflation on banks, only mentioning that there was both bad deflation and good deflation and that inside a monetary union internal devaluation was necessary. Supposedly this means that Greece is currently experiencing good deflation and could well afford a little more of it. For another, he also avoided answering my second question, or chose to interpret it as a call for inflation above two percent, which it was not, but which he was quick to denounce as “artificial” inflation. It was most revealing when he went on and referred to Greece’s pre-crisis record of wage and price developments as consistently on the high side. Hence it was now quite alright – and supposedly natural? – for Greece to experience the opposite deviation from the union average in order to restore its competitiveness.
Of course a genuinely stability-oriented mindset would then also make the symmetric argument that Germany, given that its pre-crisis record of wage and price developments was consistently on the low side, would now need to experience the opposite too, and that the internal rebalancing could be achieved in a far less painful way if all this were to happen in a way that has the ECB meeting – rather than massively undershooting – its two percent stability norm. Or is there anything “artificial” about symmetry in deviation and re-adjustment? Anything artificial about average union-wide inflation which actually averages at two percent? (Which reminds me of Olivier Blanchard’s remark made in an interview in the FAZ a little over a year ago that he “does not understand the logic of the Germans” – as Germans seem to believe that everybody can be below the average at the same time.)
One reason for the curiously “instability-oriented” policy approach of the ECB, reflecting the same kind of asymmetric mindset that was so typical of the Bundesbank, is perhaps that the ECB may just be a little fearful of “offending” Germany and the Bundesbank (even more). But I suspect there may be another reason too. A couple of years ago as the global financial crisis of 2008-9 had turned into Euroland’s so-called “sovereign debt crisis” former ECB president Mr Trichet was keen to emphasize that it was all the finance ministers’ fault as the ECB had done an absolutely perfect job: an inflation record over the euro’s lifespan of 1.97 percent (see here). Given that there were target misses in the upward direction subsequently, my instincts tell me that the ECB may be secretly longing for the day on which it can reassert that pompous claim. In other words, in blindly worshiping the gods of (in-)stability orientation, the ECB’s true nature may be that of a price level targeter. Even sizeable target undershooting may then seem quite okay. Never mind the risk of deflation. And never mind the output costs or any mass unemployment tragedies either.
Perhaps the most noteworthy aspect of Mr Mersch’s appearance at the Minsky conference in Athens was the fact that he brought two body guards along with him. So the ECB must be quite aware of the socio-economic conditions in Greece, featuring the rise of the Golden Dawn, among other things. It was good to see that as EU citizens of Greece may be asked to do without essential healthcare services thanks to mindless (pardon, stability-oriented and growth-boosting) austerity, at least some lives are always properly guarded. It was good to see that as cuts in social spending are taking their toll on lives there was at least some offset in other directions as the ECB’s seigniorage was being put to good use.
Numerous participants at the conference had sensible and constructive things to say. More information may be found on the conference website. As for my part, I presented my “Euro Treasury plan”, the discussion of which I will leave for another occasion. Let me just add here that the just published underlying research paper titled “Lost at sea: The euro needs a euro treasury” ends with the reflection that the plan would ask for nothing else from the ECB but to “interpret its mandate in a properly stability-oriented and enlightened fashion”. Would that be asking too much?