June 01, 2005
Edward Hugh on the European Central Bank
A Fistful of Euros: Crisis Looming At The ECB?: A right royal row is brewing at the ECB. Basically the old guard theorists of the "one size fits all" monetary policy are being challenged by more pragmatic observers of day to day realities. For the moments it is the politicians who are making the running (but there are plenty of competent economists in Germany and Italy who are ready to back them up), and yesterday the OECD joined the fray....
[Y]ou have the theorist of the old guard over at the ECB Otmar Issing: "European Central Bank chief economist Otmar Issing said euro zone growth differentials have to be addressed by national economic policies rather than by the ECB's interest rate policy." In fact Issing is really digging in. He provocatively gave this One Size Fits All speech on 20 May. His conclusions were as follows: "Let me conclude with a citation. On the eve of the changeover, I wrote a commentary on diversity and monetary policy in the euro area. To the question whether a single one-size monetary policy could fit all parties involved -- be they national entities, social partners or economic actors -- my answer was: 'One size must fit all'. The political decision on the creation of EMU had resolved all discussions on whether monetary union should precede or follow political unity and the fulfilment of the criteria for an optimum currency area. Today, in light of the evidence gathered so far in the euro area, I am more confident in saying: 'One size does fit all!'"p>Obviously you have to ask whether Issing in now losing his grip on reality.... As the FT notes: "The ECB has insisted that a rate cut would be harmful and was not supported by sensible economists. Jean-Claude Trichet, the ECB president, told the European Parliament on Monday: 'The last time we met, we were absolutely convinced that we would not improve the situation [with a rate cut] but that we would hamper Europe if we would go in the direction that is suggested by some.' But now that the OECD, a bastion of orthodox economic thought, has flatly contradicted the ECB's position, Mr Trichet will find it more difficult in future to reject out of hand a discussion of lower rates."...
Just to give us a measure of who is and who isn't considered a "sensible economist", one might look at today%'s statement from Hans-Werner Sinn, President of Germany's prestigious Ifo index: he is reported as telling CNBC that: "the ECB has done a good last year in keeping interest rates stable, but we have a different situation now and the ECB should cut interest rates." This situation is not without its comic aspect: Sinn means sense, ie he is the real, true to life, sensible economist.
Posted by DeLong at June 1, 2005 01:28 PM