Lack of fiscal stimulus not an excuse for the ECB not to meet its target
In a meeting last Wednesday 13 July, MEPs raised concerns on the lack of impact of the ECB’s QE programme on the real economy and the risks involved in its policy. However, justifying the failure of QE because of the lack of fiscal stimulus is a misguided argument which should not be used as an excuse to overlook other monetary policy tools.
Every year, the European Parliament assesses the activities of the ECB through the adoption of an own-initiative report. This year, Spanish MEP Ramon Tremosa (ALDE) is in charge of the report and has issued a first draft. The parliamentary Committee on Economic and Monetary Affairs (ECON) will discuss and amend this draft before it is submitted to a plenary vote later in November.
The European coalition for ‘QE For People’ is particularly concerned for the future content of the final report and will be closely watching the upcoming negotiations.
This report comes at a timely moment. Despite its massive QE programme starting one year ago, little effets have been observed in the eurozone. The ECB has still not reached its 2% inflation target since 2013, and according to the ECB's forecasts, it will take another 2 years before inflation reaches 2%. We believe this is an opportunity for the Parliament to assert its concerns over the lack of effectiveness of the ECB's quantitative easing programme, and to signal its willingness to consider alternative policy options.
In this regard, we welcome that the current draft report points to the inability of QE to trigger a low but stable rate of inflation. We also welcome that the draft highlights the various risks entailed in QE, and in particular the calls for examining the role of ultra-loose monetary policies on income inequality and asset bubbles (in the housing sector in particular).
We are also pleased that those views were shared by a certain number of MEPs during an ‘exchange of views’ between MEPs on this report (you can watch the discussion in the video below).
On the other hand, many points of the report remain unsatisfying. We are concerned by the feeling of resignation expressed by the rapporteur MEP Ramon Tremosa in his statement to the ECON Committee:
First of all we have to recognize that central banks cannot solve all problems that we have. For example, the ECB is failing to prop up inflation in the eurozone. The ECB’s balance sheet is reaching record-high and at the same time inflation expectation in the eurozone are reaching record-low. So in this respect we have to say that central banks are not omnipotent, we have to recognize it and it shows that there is a clear limit on what central banks can do, and governments cannot rely on monetary policy to solve their problems.
Whilst we agree that central banks are not omnipotent and should not be, the draft report does not examine enough why the current monetary policy is failing, and what other options are on the table.
The ECB cannot afford to wait for fiscal stimulus
A common explanation among the ECON Committee is that the ECB cannot meet its inflation target because of the lack of structural reforms and fiscal stimulus. We believe those are not valid reasons for the ECB to stop seeking ways to improve its monetary policy.
Although fiscal stimulus would be desirable in the eurozone, we believe it is unrealistic and unwise for the ECB to expect fiscal policy to make its own policy (and QE in particular) deliver its expected results. Most eurozone countries do not have the fiscal capacity necessary to stimulate internal demand. Even if countries with fiscal capacity such as Germany would boost their spendings, it would very unlikely provide the needed impact in the entire Eurozone.
While it is timely that the EU Parliament is currently evaluating how to build up a significant budgetary capacity at the EU level, this discussion could only deliver tangible results on the medium term. The ECB cannot afford to wait for such a EU fiscal capacity to be built.
We cannot stress enough that it is within the ECB’s mandate to ensure that internal demand remains high enough to keep prices stable (i.e. growing at a low but stable rate of inflation). To suggest that the ECB cannot perform its primary function of maintaining price stability because of a lack of fiscal stimulus and structural reforms is missing the point is leading to an awkward interpretation that members states are now also responsible for the ECB’s price stability mandate. Such view is confusing accountabilities in the current institutional arrangements of the eurozone.
The ECB is an independent institution. As such, it should maximize its efforts to bring inflation back to close to 2%, regardless of whether structural reforms or fiscal stimulus are carried out by member states or EU institutions.
The ECB can do better, MEPs should raise expectations
Despite all the complications that the eurozone economy is suffering from, we believe the ECB has the necessary powers to improve its monetary policy. A concept that is gaining momentum and credibility is ‘helicopter money’ whereby central bank money would be created to finance direct cash transfers to households.
As some research has shown, helicopter money is legal in the Eurozone. Our position is this would be much better at stimulating demand than the current QE programme.
Other proposals to combine QE with the lending activities of the European Investment Bank (as proposed by several of our coalition members) should be considered too, assuming this would include public investment programmes that would directly boost jobs and employment. While the draft report of Mr Tremosa already sheds light into that direction, we think this point should be significantly strengthened to be meaningful.
We are not asking the ECB to “solve all the problems”, only to accomplish its clear mandate: to delivery price stability with a 2%. MEPs should raise expectations towards the ECB by asserting their willingness to explore innovative monetary policy instruments, and offer cooperation in case this kind of policy would be pursued by the ECB.
We are available to discuss various ways the current draft report could be improved to shed more light on the possible monetary policy alternatives.