German Council of Economic Experts' view of ECB policy

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Question 1: Do you agree that exceptionally loose monetary policy by the European Central Bank is no longer appropriate?

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Question 2: Do you agree that the ECB's monetary policy masks structural problems of member states?

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Summary

The November 2016 expert survey of the Centre for Macroeconomics (CFM) and the Centre for Economic Policy Research (CEPR) invited views on a recent report by the German Council of Economic Experts (Sachverständigenrat), which argues that the current monetary policy of the European Central Bank (ECB) is no longer appropriate and that it is masking structural problems in Eurozone countries.

More than three quarters of the 64 respondents disagree with the view that ECB monetary policy should become less accommodating. Panel members also disagree with the view that ECB policy is masking structural reforms. The panel is divided, however, on whether ECB policy is making implementation of structural reforms less likely.

Background

In its annual report, the German Council of Economic Experts argues that: ‘Exceptionally loose monetary policy by the European Central Bank (ECB) contributed significantly to the upturn in the euro area, although its extent is no longer appropriate in light of the state of the recovery.’ [link to report] Moreover, the report says: ‘Given considerable structural problems persist, growth is not self-supporting. Willingness to reform has faded, and some member states lack necessary budget discipline. Monetary policy masks these problems and increasingly threatens financial stability.’

The first question in our survey asked panel members whether they think that it is indeed the case that the current monetary policy by the ECB is no longer appropriate.

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Question 1: Do you agree that that exceptionally loose monetary policy by the European Central Bank (ECB) is no longer appropriate?

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Sixty-four panel members answered this question and a very large majority (78%) disagrees or strongly disagrees with the proposition. A small minority (15%) agrees or strongly agrees. These numbers barely change if weighted with self-assessed confidence.

Among the panel members that disagree with the statement, many point to the current levels of inflation and slack in the economy. For example, Costas Milas (University of Liverpool) writes: ‘With inflation consistently under-shooting the target for more than three years now, it is really difficult to agree with the German experts. In fact, the inflation survey forecasts (from the ECB website) indicate that inflation will still be below the target (at 1.8%) in five years.’

Michael McMahon (University of Warwick) points out that: ‘The appropriateness of ECB monetary policy must be judged by whether or not it is likely to contribute to the achievement of the central bank’s objectives. These objectives are clearly laid out in Article 127(1) of the Treaty on the Functioning of the European Union. Price stability is the over-riding objective and only subject to achieving that should the ECB look to support the other objectives of the EU.’ Sushil Wadhwani (Wadhwani Asset Management) adds that: ‘To have a central bank not trying to achieve the target it set for itself would further undermine its credibility.’

Several experts think that the weak level of aggregate economic activity in the Eurozone is an additional reason for the ECB to continue its current policies. Pietro Reichlin (LUISS, Università Guido Carli) writes: ‘The recovery in most of the Euro Area economies is still lagging and this appears to be related to the ongoing debt overhang of private and public institutions… More generally, low interest rates appear to be the right policy choice to help peripheral countries with limited fiscal space in their struggle to stabilize public debt.’

It is worth pointing out that several commentators stress that monetary policy by itself is not enough. For example, Jordi Gali (Universitat Pompeu Fabra) writes: ‘I don’t think loose monetary policy by itself will be sufficient to restore growth. Instead it should be accompanied with an expansionary fiscal policy that targeted countries where underutilization of resources and deflationary pressures are more evident. Given the current high debt ratios, it would be best if the fiscal stimulus were to be financed with money creation.’

Some of the experts who disagree make clear that they are quite astonished by the views of the German Council of Economic Experts. Simon Wren-Lewis (University of Oxford) says: ‘The German policy consensus continues to show a degree of macroeconomic illiteracy which is astounding. The OECD suggests there is a sizable negative output gap in all the major Eurozone economies except Germany (where it is roughly zero). The Eurozone core inflation rate is still below 1%, and the core inflation rate in Germany is well below 2%. Even if ECB policy was made in the interests of Germany rather than the Eurozone as a whole, it is not at all clear that this report makes sense.’

Similarly, Richard Portes (London Business School) is very critical of the report: ‘unless the German Council of Economic Experts could argue that exiting from QE [quantitative easing] would raise inflation and inflation expectations, or propose alternative policies to fulfil the mandate, they should desist from ECB-bashing and let the ECB get on with trying to do its job.’

Whereas there is a lot of similarity in the reasons put forward by the majority that disagrees with the question, a variety of different reasons are given in support of the view that the exceptionally loose stance of the ECB’s current monetary policy is no longer appropriate. Sylvester Eijffinger (Tilburg University) writes that: ‘the exceptionally loose monetary policy by the ECB does not stimulate economic growth in the Eurozone and undermines financial stability by distortion of the market prices of government and corporate bonds, in particular in the peripheral countries of the Eurozone.’

Akos Valentinyi (University of Manchester) points out that: ‘another problem is that the ECB asset purchases cause a shortage of liquid assets in the Eurozone. This is a problem as new regulations increased the banks’ demand for these assets.’

John Muellbauer (University of Oxford) thinks that another disadvantage of current policies is that they may ‘be counter-productive in core Eurozone countries like Germany, France and Italy. In Germany and France, higher house prices contract consumer spending (given income etc.): home equity withdrawal is expensive or impossible so the US-type channel, which also operated in Ireland and (to a lesser extent) in Spain, is missing. Prospective first-time buyers need to save more for the large cash deposit needed to get a mortgage.’

Finally, Ray Barrell (Brunel University London) takes issue with the view of the majority that current low levels of inflation rates ask for a continuation of the current expansionary monetary policies: ‘there is clearly a good case for the ECB to modify its monetary stance. Inflation is expected to rise toward target in 2017 as oil prices have strengthened and some European economies are close to full capacity.’

ECB’s monetary policy and masking of structural problems

The second question focuses on the other claim of the German Council of Economic Experts that ECB’s expansionary policy is masking structural problems in Eurozone countries.

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Question 2: Do you agree that the ECB's monetary policy masks structural problems of member states?

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Sixty-five panel members answered this question. Panel members seem divided on this issue with a minority of 44% that either agrees or strongly agrees and a slightly larger minority of 47% that either disagrees or strongly disagrees. The residual is made up of panel members who neither agree nor disagree.

First of all, many of the experts do agree with the notion that there are non-trivial structural problems that need to be addressed. Morten Ravn (University College London) writes: There are clear needs for structural policies to address the disappointing state of many economies where high levels of youth unemployment have effectively sacrificed a generation since the financial crisis, where inequality is high, and where wage and price adjustments are very sluggish. Loose monetary policy cannot substitute for reforms.’

Reading the comments makes clear that the panel members are actually not divided on whether ECB’s monetary policy is ‘masking’ structural problems, but that they are divided on whether it potentially prevents national governments from dealing with them. For example, Charles Bean (London School of Economics) writes: I don't believe that it [ECB monetary policy] “masks” the structural problems – they are still perfectly evident – though it certainly reduces the pressure on national governments to address them.’

Since our panel members do not seem to think that ‘masking’ is the problem, we focus the remainder of this summary on our panel’s views on whether ECB’s monetary policy makes it less likely or more likely that structural reforms will be implemented. On this issue, the panel members are clearly divided.

The key argument supporting the view that continuation of the ECB’s expansionary policy will make implementation of structural reforms more likely is that this is easier to do in an environment in which monetary policy stimulates economic activity. John Driffill (Birkbeck, University of London) says that one can implement ‘such reforms more easily in an situation of low unemployment and robust growth rather than in a high unemployment/low growth situation, since the initial effects of such reforms might well be to cause more, not less, unemployment, even though their long-term effects will enable lower unemployment.’

The key argument supporting the view that ECB’s monetary policy is preventing or at least delaying structural reform is the moral hazard issue that the ECB’s exceptionally loose monetary policy is lowering interest payments on sovereign debt and, by doing so, making it less critical for governments to implement policies that safeguard government financing. Several commentators support this view.

Roberto Perotti (Università Bocconi) argues that: ‘There is no doubt that high-debt countries, and Southern European countries in general, have benefited enormously from the “whatever it takes” of Draghi. There is little doubt that the decline in interest rates on their public debt has encouraged them to take it easy in terms of their fiscal policy, after some effort around 2011 and 2012. This is a very standard moral hazard problem of loose monetary policy.’

Roberto Perotti does qualify this statement by adding: ‘however, there is a huge uncertainty regarding the appropriateness of a very tight fiscal policy in these countries anyway; in addition, none of them gives signs of sheer fiscal irresponsibility, just some relaxation. In light of this, again prudence would suggest accepting these side costs and continuing with the current monetary policy for some time.’

Similarly, Pietro Reichlin is of the opinion that: ‘to some extent, I agree that we cannot ignore the moral hazard induced by ECB actions in a Monetary Union, where member countries retain their sovereignty over spending and public debt.’ But he also points out that there are caveats, one of which is that: the ECB promise to raise inflation up to the 2% target has not being delivered, and this imposes further limits to the solutions of the structural problems faced by peripheral economies.’

Richard Portes takes a very strong position against the moral hazard argument: ‘“Masks structural problems” by promoting economic expansion and price stability? Give me a break. … The only story is the “moral hazard” argument – that governments feel less pressure to reform if they feel less pressure from the bond markets. Where is the evidence? The slowdown in reforms supposedly documented by the OECD is not based on any quantitative evidence. Even if one accepted it, one could argue that previous reforms had exploited “low-hanging fruit”, so it would be normal that the observed effort would slow down. Moreover, it is a common political economy argument (with some empirical support) that reforms are easier in the context of a reasonable pace of growth – otherwise there are too many losers. Did Mr Schaeuble write this report?’

But some panel members do see evidence for the negative effects of current ECB monetary policy. Sylvester Eijffinger argues that: ‘a very clear example is the structural reform agenda of the Italian prime minister Renzi which has not been implemented since almost two years with reference by Renzi to the Italian low capital market interest rates which make structural reforms in Italy less necessary.’

In striking contrast, John Muellbauer thinks that the experience in Italy provides support for the opposing view: ‘it is true that ECB QE has pushed the spread of Italian sovereign bonds a little below what economic fundamentals would suggest. But there is not much evidence that high values of these spreads in the past led to systematic reforms in Italy.’

Finally, there are panel members who think that monetary policy is not relevant. Luigi Guiso (Einaudi Institute for Economics and Finance) writes: ‘there are member states that undoubtedly have serious structural problems; monetary policy is neither masking nor delaying those problems. The truth is that the solutions to those structural problems are totally independent of the monetary policy regime. They depend on deeper features of those countries, not least their institutional design and ability to cope with political economy problems.’

Whether ECB monetary policy accommodates or prevents implementation of structural reform is a fascinating question. In terms of judging the ECB, however, it is important to keep in mind that: ‘the ECB would be straying beyond its legal mandate were it to deliberately underachieve on its inflation objective in order to place more pressure on member states to undertake the necessary reforms. Such behaviour by the ECB would lack democratic legitimacy’, in the words of Charles Bean.

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How the experts responded

Is ECB's exceptionally loose monetary policy no longer appropriate?

Participant Answer Confidence level Comment
Panicos Demetriades University of Leicester Disagree Confident
I don't understand how they can say that with inflation so much lower than the 2% target. Would they be saying that monetary policy shouldn't be tight if inflation was near 4%?
Wouter Den Haan London School of Economics Strongly disagree Very confident
It would be extremely risky if the ECB would abandon its current course. The Eurozone is still very fragile and it would not surprise me that it could easily get much worse without the ECB's accommodating policies
Philippe Martin Sciences Po, Paris Disagree Very confident
Gianluca Benigno London School of Economics Disagree Confident
With average unemployment rate of about 10% and inflation still below the target, accommodative policies (not only monetary) are needed.
Nezih Guner CEMFI Agree Confident
Claudio Michelacci EIEF Strongly disagree Extremely confident
Sir Charles Bean London School of Economics Disagree Confident
While the euro area's primary economic problems can only be addressed with structural reforms, there is still spare capacity, as evidenced by the elevated level of unemployment and persistently weak underlying inflation. Given that, the ECB's policy stance seems to me to be entirely warranted (though I would prefer to see more of the burden in sustaining aggregate demand being shouldered by fiscal policy, especially in Germany).
Jürgen von Hagen Universität Bonn Strongly Agree Extremely confident
Jagjit Chadha National Institute of Economic and Social Research Disagree Confident
Actually policy could be tightened somewhat and still be exceptionally loose by historical standards. So I interpret the questions as asking whether the process of normalisation ought to begin and as a corollary whether markets ought to start preparing for some exit from balance sheet policies and a return to positive interest rates. I think it is still a little early to reserve the policies but it is not too early to explain the conditions under which policy normalisation might occur. We need to start by clarifying the target for the ECB of being close too but below 2% inflation, which is both asymmetric and suggests a negative inflation bias. A simple 2% target with 1% bands would be a start.
Stefan Gerlach BSI Bank Disagree Very confident
Akos Valentinyi University of Manchester Strongly Agree Extremely confident
The Eurozone current problems cannot be solved with monetary policy alone, and it may well have became counterproductive. One problem the euro zone faces right now is that many of its banks are undercapitalised including Deutsche Bank. Unless these banks are recapitalised in some way, it is difficult to see how credit expands and more robust growth returns to Eurozone economies. Loose monetary policy cannot fix this problem. Another problem is that the ECB asset purchases causes shortage of liquid assets in the Eurozone. This is a problem as new regulations increased the banks' demand for these assets.
Francesco Lippi Università di Sassari Disagree Confident
Fabien Postel-Vinay University College London Disagree Not confident
Ray Barrell Brunel University London Agree Very confident
Exceptionally loose monetary policy. There is clearly a good case for the ECB to modify its monetary stance. Inflation is expected to rise toward target in 2017 as oil prices have strengthened and some European economies are close to full capacity. How much scaling down of asset purchase schemes is required depends on factors such as changes in the stance of fiscal policy in the Euro Area and elsewhere. Asset purchases were a wise response to excess capacity and negative inflation in the Euro Area, and perhaps should have been introduced earlier. The sharp decline in oil prices at the end of 2014 made the ECBs task much harder, as it brought inflation down to levels that required unusual measures to help expand demand after the Euro Area crisis affected the economies in 2012 to 2014. Historically low real interest rates globally left little room for traditional methods of monetary expansion when inflation was close to zero. Hence unusual measures were called for. They will no longer be needed unless fiscal policy is tightened across Europe.
Sushil Wadhwani Wadhwani Asset Management Strongly disagree Very confident
Unemployment remains well above any reasonable estimate of its equilibrium level and forecast inflation is below target.To have a central bank not trying to achieve the target it set for itself would further undermine its credibility. Premature tightening/tapering now would abort the recovery,increase intra-European spreads and lead to increased tensions within the monetary union. It is highly likely that it would come to be seen as significant policy mistake.
David Cobham Heriot Watt University Strongly disagree Very confident
Economic growth in the Eurozone continues to be below the level required to return to the trend output path, let alone recoup the losses experienced since 2010. Monetary policy can and should continue to contribute to growth, but it needs to be accompanied by some serious contraclyclical fiscal policy. The call for more and more structural reform (together with a refusal to consider inequality and poverty issues) is likely to be self-defeating. Overall, the GCEE report is a disappointing rerun of the same old diagnoses and policy recommendations which have already done so much damage to the Eurozone economy. The GCEE should think deeply about the failure of its policy recommendations to date, and should take more account of welfare in the non-German economies.
Mirko Wiederholt Goethe University Frankfurt Disagree Confident
John Muellbauer Nuffield College, University of Oxford Strongly Agree Very confident
current policies are stimulating growth in high private debt countries such as Ireland and Spain, but may even be counter-productive in core EZ countries like Germany, France and Italy. In Germany and France, higher house prices contract consumer spending (given income etc): home equity withdrawal is expensive or impossible so the US-type channel which also operated in Ireland and (to a lesser extent) in Spain is missing. Prospective first time buyers need to save more for the large cash deposit needed to get mortgage. Renters worry about higher housing rents in future and are more cautious. The mechanism is explained in: “Credit, housing collateral and consumption in the UK, U.S., and Japan”, with Janine Aron, John Duca, Keiko Murata and Anthony Murphy, Review of Income and Wealth, 58(3), 397–423, 2012. France (Chauvin and Muellbauer, 2013), Germany (Geiger, Muellbauer & Rupprecht, ECB wp, 2016) In Germany, France and Italy, savers’ liquid assets greatly outweigh household debts: lower real returns therefore reduce aggregate household spending. Low rates affect not only the interest income and hence consumption of those already retired, but if expected to continue, should raise the saving rate of those saving for retirement. Low returns imply more has to be put aside from current income to achieve a given retirement income. Other reasons why conventional Euro Zone QE is not working include the following: 1) defined benefit pensions are hugely in deficit using lower discount rates, so companies need to put aside profits, try to reduce benefits or raise contributions. 2) Higher house prices are socially divisive: mainly the affluent or their children can overcome down-payment constraints. Overvaluation of house prices raises stability risks for the future. 3) Negative rates hurt bank profits and bank equity and reduce credit flows – hence the ECB's TLTRO-2 subsidy wheeze but this was more of a sticking plaster than a cure. 4) Long-term insurers’ business model is under threat and if people lose confidence in these saving products they may increase precautionary saving. 5) Retaliation by other central banks, in current circumstances, weakens QE’s beggar-thy-neighbour exchange rate stimulus. So, to the extent that current ECB policies lead to the perpetuation of negative real rates, they are counter-productive. If the ECB were permitted to engage in monetary finance of the fiscal authorities or in direct 'helicopter drops', monetary policy would be far more effective.
Sir Christopher... London School of Economics Strongly disagree Extremely confident
The eurozone is still in dissaray over many things, such as banking union, high unemployment in most countries, lack of fiscal cooperation and many others. Loose monetary policy helps a little so lets have it. But what is more urgent is for Germany to pay more attention to the needs of the whole of the eurozone and stop trying to get monetary policy to move in the austerity direction too. Willingness to reform is fading because reform with austerity don't work
John Hassler Institute for International Economic Studies (IIES), Stockholm University Disagree Confident
Alan Sutherland University of St Andrews Disagree Not confident
Morten Ravn University College London Agree Confident
The difference in performance between the northern and southern parts of the Euro area cannot be corrected for by loose monetary policy neither can low growth. There is a need to use other policies and probably also to consider whether there is a need for cross-Euro-area transfers. If monetary policy is tightened, it would be important, however, to keep an eye on the state of some of the larger financial institutions in Europe.
Jonathan Portes National Institute of Economic and Social Research Strongly disagree Extremely confident
The proposition is self-evidently absurd, given the euro area's extremely weak growth since the crisis and persistently high levels of unemployment Of course the euro area (at the individual country level, and collectively) has significant structural/supply side problems. Addressing those problems will be made harder, not easier, by lower demand and/or tighter monetary or fiscal policy. On the contrary what the euro area needs is continued accommodative monetary policy combined with fiscal stimulus in a number of countries: this will help facilitate supply side improvements.
Elias Papaioannou London Business School Disagree Confident
Ricardo Reis London School of Economics and Columbia University Disagree Confident
Given current euro-area estimates of economic slack and inflation in the near term, I would not describe ECB monetary policy as "extraordinarily loose". Moreover, among the many tools employed by the ECB right now, I would argue that some may be discontinued, but others should be maintained and expanded, and new ones should be implemented, so it is hard to agree that all of it is no longer appropriate. More narrowly, if we mean that the current level of the interest rate (the deposite facility rate) should be raised, then I (weakly) disagree; I don't see the obvious benefits of raising rates right now in the euro-area.
Gernot Müller Eberhard-Karls-Universität Tübingen Disagree Confident
Lars E O Svensson Stockholm School of Economics Strongly disagree Very confident
David Bell University of Stirling Disagree Not confident
The belief that simultaneously tightening monetary and fiscal policy and relying on structural reform to revive the European economy without any consideration of the weakness of demand seems to reflect a triumph of hope over experience.
Pietro Reichlin Università LUISS G. Carli Strongly disagree Very confident
The recovery in most of the Euro Area economies is still lagging and this appears to be related to the ongoing debt overhang of private and public institutions. Furthermore, the current inflation rate is far from the two percent target. More generally, low interest rates appear to be the right policy choice to help peripheral countries with limited fiscal space in their struggle to stabilize public debt.
Paul De Grauwe London School of Economics Strongly disagree Very confident
Giuseppe Bertola Università di Torino Disagree Extremely confident
Inflation expectations and investment need to be a lot more solid.
David Miles Imperial College Disagree Confident
Sylvester Eijffinger CentER, Tilburg University Strongly Agree Extremely confident
The exceptionally loose monetary policy by the ECB does not stimulate economic growth in the Eurozone and undermines financial stability by distortion of the market prices of government and corporate bonds, in particular in the peripherical countries of the Eurozone. Therefore, the non-performing loans of Italian and other banks will be rolled over and the necessary structural labour market and product market reforms in France, Italy and other eurocountries are not implemented.
Jim Malley University of Glasgow Agree Confident
Pierpaolo Benigno Università LUISS G. Carli Neither agree nor disagree Extremely confident
Low interest rate policies are appropriate together with enhanced forward guidance, but QE might be ineffective.
Kate Barker Senior Adviser to Credit Suisse Agree Confident
Robert Kollmann Université Libre de Bruxelles Strongly disagree Confident
Euro Area Inflation is still below target, and growth projections for the EA remain subdued. Tightening monetary policy now would probably destroy the very timid EA recovery.
Gino A. Gancia CREI and Universitat Pompeu Fabra Disagree Confident
Michael Wickens Cardiff Business School & University of York Agree Confident
As in other countries, the ECB's loose monetary policy has helped the financial sector and improved fiscal budgets by reducing government debt interest payments. But it hasn't led to an expansion of private borrowing, the key to restoring economic growth. This policy has now reached the end of the road and is no longer appropriate. In its defence the ECB may with good reason claim that it is still the only game in town. What is required is an increase in private sector expenditures. What has happened is that all eurozone countries have instead increased private sector financial balances. Private savings are over 13 per cent of GDP in The Netherlands and nearly 9 per cent in Germany.
Ethan Ilzetzki London School of Economics Strongly disagree Extremely confident
Eurozone inflation is 0.5%. The ECB's target is 2%. Case closed.
Harris Dellas University of Bern Neither agree nor disagree Confident
Fabrizio Coricelli Paris School of Economics Disagree Very confident
Lacking expansionary fiscal policy and effective solutions for bad loans in the periphery of the eurozone, loose monetary policy is the second best policy
Jean Imbs Paris School of Economics Neither agree nor disagree Very confident
Paolo Surico London Business School Disagree Confident
Philippe Bacchetta Université de Lausanne Strongly disagree Confident
Tommaso Monacelli IGIER, Università Bocconi Disagree Confident
Michael McMahon University of Warwick Strongly disagree Very confident
The appropriateness of ECB monetary policy must be judged by whether or not it is likely to contribute to the achievement of the central bank's objectives. These objectives are clearly laid out in Article 127(1) of the Treaty on the Functioning of the European Union. Price stability is the over-riding objective and only subject to achieving that should the ECB look to support the other objectives of the EU. In the absence of the current loose monetary policy, the risks of a prolonged deflation would be even greater and hence the ECB is right to maintain that monetary stance. That structural reforms are necessary is also right, but it is not the role of the ECB to suffocate euro-area economies, jeopardising price stability, in order to create incentives for the governments to reform.
Costas Milas University of Liverpool Disagree Very confident
With inflation consistently under-shooting the target for more than 3 years now it is really difficult to agree with the German experts. In fact, the inflation survey forecasts (from the ECB website) indicate that inflation will still be below the target (at 1.8%) in five years...
Cédric Tille The Graduate Institute, Geneva Strongly disagree Extremely confident
While structural reforms are necessary in the long run, there is a risk that adopting reforms in the current environment can put downward pressure on prices, and thus hinder the ECB efforts towards bringing inflation to its target. In addition there is no evidence that a less accomodative monetary policy would stimulate the adoption of reforms. The argument that the ECB "masks" this problems is not correct.
Sean Holly Cambridge University Disagree Confident
Harry Huizinga CentER, Tilburg University Disagree Very confident
Jan Eeckhout University College London Neither agree nor disagree Confident
John Driffill Birkbeck College, University of London Disagree Confident
Inflation in the Euro zone is still well below 2% and is likely to stay there. The ECB should continue to pursue its 'exceptionally loose' policy until there are clear signs that inflation is likely to exceed the 2% target rate. Only then should any tightening be considered.
Antonio Fatás INSEAD, Singapore Strongly disagree Very confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Strongly disagree Extremely confident
Even if one believes that output is close to potential (I don't) inflation is still well below the ECB target.
Luigi Guiso Einaudi Institute for Economics and Finance (EIEF) Strongly disagree Extremely confident
many countries in the area are still under risk of deflation; the economic outlook of the area as a whole is still gloomy and economy recovery too weak to reverse policy interest rates and abandon quantitative easing
Richard Portes London Business School and CEPR Strongly disagree Extremely confident
The ECB has a single mandate, specified in the Treaty: price stability. The ECB itself has defined what that means: inflation close to but not exceeding 2 percent. It has manifestly failed to fulfill its mandate, and consequently by mid-2014 inflation expectations had become 'de-anchored'. QE stopped the slide, but the latest survey of professional forecasters (2016 Q3) shows 5-year ahead inflation expectations still at the level of 2015Q1. Unless the German Council of Economic Experts could argue that exiting from QE would raise inflation and inflation expectations, or propose alternative policies to fulfil the mandate, they should desist from ECB-bashing and let the ECB get on with trying to do its job.
Francesco Giavazzi IGIER, Università Bocconi, Milano Strongly disagree Confident
the question says "no longer appropriate", referring, as I interpret it to current conditions. My answer would have been different had the question referred to "conditions going forward", that is if it was forward looking, say over the next two years
Fabio Canova BI Norwegian School of Management Strongly disagree Very confident
My personal estimates is that without the measures inflation would be between 0.6 and 1% lower than what it is now and output about 0.5-0.8 % lower. I do not see any upturn or growth happening yet.
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Disagree Confident
Both inflation and unemployment in the euro area remain far from desirable levels and show few signs of improvement. So the current policy seems warranted. On the other hand, I don't think loose monetary policy by itself will be sufficient to restore growth. Instead it should be accompanied with an expansionary fiscal policy that targeted countries where underutilization of resources and deflationary pressures are more evident. Given the current high debt ratios, it would be best if the fiscal stimulus were to be financed with money creation. A response of this kind would be not only desirable but absolutely necessary if a large adverse shock were to hit the euro area while the policy rate was stuck at zero.
Francesco Caselli London School of Economics Strongly disagree Very confident
Simon Wren-Lewis University of Oxford Strongly disagree Extremely confident
The German policy consensus continues to show a degree of macroeconomic illiteracy which is astounding. The OECD suggests there is a sizable negative output gap in all the major EZ economies except Germany (where it is roughly zero). The EZ core inflation rate is still below 1%, and the core inflation rate in Germany is well below 2%. Even if ECB policy was made in the interests of Germany rather than the EZ as a whole, it is not at all clear that this report makes sense.
Roberto Perotti IGIER, Università Bocconi Disagree Not confident
It is true that the current level of low nominal interest rates probably has adverse effects on the functioning and profitability of banks and especially insurance companies (the latter especially in Germany because of specifici regulation in that country). These effects are however not well understood yet. On the other hand, inflation in Europe is still extremely low, and displays very few signs of increasing. Given that most of Europe is still doing between OK and badly in terms of output growth and output gap (whatever that is ....), prudence would suggest continuing with the present monetary policy at least until inflation shows some signs of rising.
Mario Forni Università di Modena Strongly disagree Very confident

Does ECB policy mask structural problems?

Participant Answer Confidence level Comment
Panicos Demetriades University of Leicester Disagree Confident
There is no doubt that political willingness to reform has faded but where's the evidence that this is due to the ECB? The fatigue is much more to do with the fact that the reforms that are proposed or dictated aren't growth or employment friendly.
Wouter Den Haan London School of Economics Disagree Very confident
There may be some truth to this, but if a premature withdrawal of expansionary monetary policies leads to a downward spiral then structural problems will definitely not become transparent.
Philippe Martin Sciences Po, Paris Disagree Very confident
Gianluca Benigno London School of Economics Neither agree nor disagree Confident
Structural problems in the member states and in particular in the so-called periphery of Europe have been exacerbated by the stance of fiscal policy. Monetary policy is contributing by keeping sovereign yields of countries with high public debt and stagnating conditions at very low level.
Nezih Guner CEMFI Strongly agree Confident
The ECB is trying to use monetary policy to influence the economic activity in the whole Euro area, despite significant differences among member states in fiscal policy, labor markets and social policy. Without further coordination and integration of such policies and real economic activity, the effects of monetary policy will be short-lived and can indeed limit the willingness of members states to face reforms. A coordinated effort to push structural reforms in member states might be the only option to make the Euro area more resistant to shocks in the long run, since a push for more integration in fiscal policy, labor markets and social policy does not seem to be on the political agenda at this moment.
Sir Charles Bean London School of Economics Disagree Confident
I don't believe that it "masks" the structural problems - they are still perfectly evident - though it certainly reduces the pressure on national governments to address them. However, the ECB would be straying beyond its legal mandate were it to deliberately underachieve on its inflation objective in order to place more pressure on member states to undertake the necessary reforms. Such behaviour by the ECB would lack democratic legitimacy.
Claudio Michelacci EIEF Agree Very confident
Jürgen von Hagen Universität Bonn Strongly agree Extremely confident
Jagjit Chadha National Institute of Economic and Social Research Disagree Confident
Structural problems simply cannot be addressed by aggregative monetary policy they are more likely to exposed by them because there are such differences in regional composition of the aggregate.
Stefan Gerlach BSI Bank Disagree Confident
Akos Valentinyi University of Manchester Neither agree nor disagree Very confident
It is not so clear how much it masks them. These structural problems are well known. The question is to what extent loose monetary policy allows the governments to postpone the costly measures which can remedy these structural problems. We do not really know as individual governments of the Eurozone would still have room for manoeuvre to postpone the required measures.
Francesco Lippi Università di Sassari Agree Confident
Fabien Postel-Vinay University College London Disagree Confident
Ray Barrell Brunel University London Disagree Confident
The ECB's policies have not masked structural problems, but these have been made more difficult to deal with by a fiscal policy stance that has been tighter than needed in most European countries. Nominal growth in Europe is likely to rise sharply in 2017 as the depressing effects of the fall in the oil price stop impacting on inflation. Few countries in Europe are running fiscal deficits that will cause debt stocks to rise as a percent of GDP. Structural problems still persist in Europe, and they reduce equilibrium output and raise sustainable employment. Labour and product market restrictions may also reduce the speed at which an economy can move when it is not at capacity. However, none of these factors stop growth being sustainable, and this is more likely to arise from a shortage of demand, and especially from tight fiscal policies. Public financed infrastructure investment in most European economies would help reduce structural problems, and reductions in unemployment amongst the young and the unskilled in countries such as Spain, France and Italy would leave space for structural reforms to labour protection and employment legislation. It is important to remember that Europe is not Germany, and the rest consists of much more than Greece. Policy needs to be set, and criticised, in relation to the whole of the Euro Area, not just its extremes.
Sushil Wadhwani Wadhwani Asset Management Agree Confident
It would clearly be preferable if politicians made greater efforts in terms of reform. It is highly likely that long-term growth could be increased if politicians "get their act together". In the short run, ECB policy is stimulative and keeps growth higher than it might otherwise be and,in that sense, it can be said to be "masking" the structural problems of the Euro area. However, it is also plausible that politicians will find it easier to enact significant reforms when the economy is in an upswing than when it is in a recession. Therefore, i am not sure that the fact that politicians have not done enough would,in any way, justify a tapering of monetary stimulus by the ECB.Indeed, i would argue that continuing the current level of asset purchases makes it more likely that politicians will eventually do some of the correct things.
John Muellbauer Nuffield College, University of Oxford Strongly disagree Very confident
the structural problems are all too obvious: the huge gap in competitiveness between Germany on the one hand and Italy, Portugal and France on the other; and the lack of structural reforms to address this issue, particularly in Italy. It is true that ECB QE has pushed the spread of Italian sovereign bonds a little below what economic fundamentals would suggest. But there is not much evidence that high values of these spreads in the past led to systematic reforms in Italy. as far as Spain, Portugal and Ireland are concerned, ECB policies in recent years have helped those economies grow, given high private debt levels, and have reduced imbalances in the EZ as far as those countries are concerned. The German Expert Council's endorsement of extremely counter-productive fiscal policies which are holding back growth in Europe is a problem. At the very least, they should be urging major fiscal expansion in Germany. The negative 'forward guidance' of current fiscal policies is a huge brake on economic expansion, see http://voxeu.org/article/helicopter-money-and-fiscal-rules
David Cobham Heriot Watt University Strongly disagree Very confident
Of course structural problems exist (and will always exist). But there would be much more opportunity to deal with the structural issues if the economies of the Eurozone could return to a decent level and rate of growth of GDP. Deal with the short-term problem in the short-term, and the long-term problem in the long term (and don't manufacture moral hazard stories to preclude this)!
Mirko Wiederholt Goethe University Frankfurt Agree Confident
Sir Christopher... London School of Economics Strongly disagree Extremely confident
It helps the reform process by providing breathing space. If fiscal policy did the same we would be there by now
John Hassler Institute for International Economic Studies (IIES), Stockholm University Agree Confident
Alan Sutherland University of St Andrews Neither agree nor disagree Confident
Morten Ravn University College London Agree Very confident
I agree on this. There are clear needs for structural policies to address the disappointing state of many economies where high levels of youth unemployment has effectively sacrificed a generation since the financial crisis, where inequality is high, and where wage and price adjustments are very sluggish. Loose monetary policy cannot substitute for reforms.
Jonathan Portes National Institute of Economic and Social Research Strongly disagree Extremely confident
The proposition is at best meaningless. Of course reforms are needed; excessively tight policy (monetary and fiscal) makes reforms harder, both politically (as it weakens popular support for sensible economic policies) and economically (since it is less likely that the supply side will respond well if demand is weak. Labour market reform in France - long overdue - is a case in point.
Ricardo Reis London School of Economics and Columbia University Disagree Confident
The structural problems are so clear and have been identified so many times by so many, that it is hard to argue that they carry a "mask". So, I have trouble moving to the next question of who is providing the mask in the first place. More importantly, the ECB's mandate is to keep inflation under control. See figure 2 here (https://ideas.repec.org/p/cfm/wpaper/1626.html); the ECB has done a very good job keeping the price level growing at 2% per year on average, and that is the main thing it should worry about.
Elias Papaioannou London Business School Strongly agree Very confident
Evi Pappa European University institute Disagree Very confident
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Confident
Lars E O Svensson Stockholm School of Economics Disagree Confident
David Bell University of Stirling Agree Confident
Solving these problems is a necessary, but not sufficient, condition for European economic recovery
Pietro Reichlin Università LUISS G. Carli Neither agree nor disagree Very confident
To some extent, I agree that we cannot ignore the moral hazard induced by ECB actions in a Monetary Union, where member countries retain their sovereignty over spending and public debt. However, there are two caveats. The first is that, in my view, fiscal discipline and efforts in implementing structural reforms have gone sufficiently far after the hard lesson learned in the 2011 financial crisis. The second is that the ECB promise to raise inflation up to the 2 per cent target has not being delivered, and this imposes further limits to the solutions of the structural problems faced by peripheral economies.
Paul De Grauwe London School of Economics Strongly disagree Very confident
Giuseppe Bertola Università di Torino Neither agree nor disagree Not confident at all
Structural problems there are, but "masks" and "member states" make statement pointless
David Miles Imperial College Agree Confident
Sylvester Eijffinger CentER, Tilburg University Strongly agree Extremely confident
The ECB's Monetary policy masks the structural problems in the Eurozone member states and creates a lack of confidence and trust which is extremely harmful for economic growth in the Eurozone. A very clear example is the structural reform agenda of the Italian prime minister Renzi which has not been implemented since almost two years with reference by Renzi to the Italian low capital market interest rates which make structural reforms in Italy less necessary.
Jim Malley University of Glasgow Agree Confident
Pierpaolo Benigno Università LUISS G. Carli Strongly agree Extremely confident
Yes, it tends to postpone structural adjustments at the single country level and also delaying convergence to a more integrated union, since it conveys the mistaken idea that the current situation can survive longer. Since OMT announcement and QE policies, any discussion on Eurobonds has been disappearing as well as other discussions on debt mutualization and so forth
Kate Barker Senior Adviser to Credit Suisse Agree Confident
Robert Kollmann Université Libre de Bruxelles Neither agree nor disagree Confident
Accommodating ECB monetary policy may reduce the incentive to address structural problems. However, ECB policy does not mask the structural problems, as these problems seem so obvious. The ECB has persistently insisted on the need for structural reforms.
Michael Wickens Cardiff Business School & University of York Strongly agree Extremely confident
This is obviously correct; there are a large number of structural problems that need to be addressed in order to stimulate growth. The euro is preventing countries from restoring international competitiveness; using internal deflation to restore competitiveness is very costly. Labour markets need reform. The banks in several countries are close to collapse. Capital markets need to work better. Fiscal policy is constrained by huge debts and large expenditures.
Gino A. Gancia CREI and Universitat Pompeu Fabra Disagree Confident
Ethan Ilzetzki London School of Economics Disagree Confident
I think there are structural problems and ECB policy may on the margin be enabling governments to postpone reform, but I disagree with the characterization that the ECB is masking these structural problems.
Harris Dellas University of Bern Strongly agree Very confident
Fabrizio Coricelli Paris School of Economics Agree Very confident
Jean Imbs Paris School of Economics Strongly agree Extremely confident
Paolo Surico London Business School Disagree Confident
Philippe Bacchetta Université de Lausanne Strongly agree Very confident
Tommaso Monacelli IGIER, Università Bocconi Disagree Confident
Michael McMahon University of Warwick Agree Confident
In the absence of the current loose monetary stance, the euro-area economy would be considerably weaker and one of the major causes of this underlying weakness are structural problems that warrant attention in the form of structural policy reforms. So it is true that ECB monetary policy is partly off-setting structural problems. However, as I said above, the fact that structural reforms are needed is not, in my view, a reason for the ECB to ignore it's primary objective.
Costas Milas University of Liverpool Agree Not confident
Cédric Tille The Graduate Institute, Geneva Strongly disagree Very confident
A less accomodative policy would not raise the appetite for reform.
Sean Holly Cambridge University Agree Confident
Jan Eeckhout University College London Agree Very confident
John Driffill Birkbeck College, University of London Disagree Confident
It doesn't mask them. It may ameliorate their effects. Member states in which "further structural reforms are needed that facilitate more flexible wage and price formation and increase labour mobility" (as the report says) will be able to make such reforms more easily in an situation of low unemployment and robust growth rather than in a high unemployment/low growth situation, since the initial effects of such reforms might well be to cause more, not less, unemployment, even though their long-term effects will enable lower unemployment.
Antonio Fatás INSEAD, Singapore Strongly disagree Very confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Disagree Very confident
Luigi Guiso Einaudi Institute for Economics and Finance (EIEF) Strongly disagree Very confident
There are member states that undoubtedly have serious structural problems; monetary policy is nether masking nor delaying those problems. The truth is that the solution to those structural problems are totally independent of the monetary policy regime. They depend on deeper features of those countries, not last their institutional design and ability to cope with political economy problems.
Richard Portes London Business School and CEPR Strongly disagree Extremely confident
'Masks structural problems' by promoting economic expansion and price stability? Give me a break. They neither propose nor show any causal link. The only story is the 'moral hazard' argument - that governments feel less pressure to reform if they feel less pressure from the bond markets. Where is the evidence? The slowdown in reforms supposedly documented by the OECD is not based on any quantitative evidence. Even if one accepted it, one could argue that previous reforms had exploited 'low-hanging fruit', so it would be normal that the observed effort would slow down. Moreover, it is a common political economy argument (with some empirical support) that reforms are easier in the context of a reasonable pace of growth - otherwise there are too many losers. Did Mr Schaeuble write this report?
Per Krusell Stockholm University Agree Confident
This does not make the policy a bad policy, but it is a side effect. Separate monitoring and policy is needed to address these structural problems.
Fabio Canova BI Norwegian School of Management Disagree Confident
Structural problems are present regardless of what the ECB does. ECB policies have helped to reestablish normal lending conditions. Do nto see in what why the mask problems
Francesco Caselli London School of Economics Disagree Confident
Simon Wren-Lewis University of Oxford Strongly disagree Extremely confident
One of the most disastrous ideas coming from Germany is that you require deficient demand to encourage 'structural reform'. It helped delay OMT until 2012, and legitimizes the appalling treatment of Greece. The task of monetary policy should be to stabilize EZ demand and inflation, and not to encourage particular reforms in member states.
Roberto Perotti IGIER, Università Bocconi Strongly agree Confident
There is no doubt that high-debt countries, and Southern European countries in general, have benefited enormously from the "whatever it takes" of Draghi. There is little doubt that the decline in interest rates on their public debt has encouraged them to take it easy in terms of their fiscal policy, after some effort aroun 2011 and 2012. This is a very standard moral hazard problem of loose monetary policy. However, there is a huge uncertainty regarding the appropriatness of a very tight fiscal policy in these countries anyway; in addition, none of them gives signs of sheer fiscal irresponsibility, just some relaxation. In light of this, again prudence would suggest accepting these side costs and continuing with the current monetary policy for some time.
Mario Forni Università di Modena Strongly disagree Very confident
Tryphon Kollintzas Athens University of Economics and Business Agree Very confident
Kevin Hjortshøj... Oxford University Disagree Confident
A country with structural problems may still need supportive macroeconomic policies so this strikes me as a very odd statement.