Policy
22.11.19

Helmut Kohl would have kept silent

ECB-bashing by German politicians is irresponsible and undermines trust in the euro

This text was first published in German at ZEIT ONLINE. You can find the full text here.

Almost thirty years ago, Helmut Kohl had two central demands when he negotiated the design of the euro on behalf of Germany: Firstly, the new European Central Bank (ECB) should strictly pursue price stability and not, like the American Fed, also take unemployment into account; and secondly, it should be at least as independent from political influence as the German Bundesbank. Kohl prevailed on both counts.

But it is precisely this part of Kohl's legacy that provokes the ire of an increasing number of German politicians. They would like to further restrict the ECB's room for manoeuvre – by prescribing a certain inflation target, for example, or by banning certain monetary policy instruments. Often these critics justify their proposals by accusing the ECB of breaking the law: as the ECB has allegedly moved outside its mandate, it must be contained.

These kinds of comments are irresponsible for three reasons.

First, they undermine citizens' confidence in the ECB. Someone who keeps hearing that the ECB is constantly breaking the law will eventually start to believe it. Yet this accusation is simply wrong. It is the role of the European Court of Justice (ECJ) in Luxembourg to assess the legality of the actions of EU institutions. At the request of the German Constitutional Court, the ECJ has twice considered and twice vindicated the ECB's recent monetary policy measures. One can disagree with the ECB's decisions - but those who accuse the ECB of acting outside its mandate are knowingly ignoring the final rulings of Court and making blatantly false statements.

Second, these demands challenge the independence of the ECB. An independent central bank depends on politicians to let it do its job. If every politician in Europe felt the need to express their own opinion on an upcoming interest rate decision, the central bank would inevitably be suspected of giving in to pressure from one side or the other. Politicians have a responsibility here: The responsibility to exercise restraint. The more politicians fail to hold themselves back from commenting on monetary policy, the more difficult they make the work of the ECB.

Third, these comments suggest that the only thing standing in the way of a different monetary policy is the ECB's stubbornness, and thus distract attention away from the responsibility of politicians. A guiding principle of the Bundesbank was always that an independent central bank makes decisions given the economic and financial policy conditions of the moment. It does not coordinate its monetary policy with other actors. The ECB does the same: It does not act, it reacts. The current economic situation in the Eurozone calls for a highly expansionary monetary policy. The Governing Council of the ECB, including President Weidmann of the Bundesbank, agrees on this, even if there is a dispute concerning the choice of instruments.

So if politicians want interest rates to rise, they should not look to Frankfurt but should instead work on creating the necessary economic conditions. The fact that German politicians are particularly vocal on this matter has a certain irony to it: Germany is currently on the verge of a recession with the second weakest growth numbers in the Eurozone. Thus, the German economy in particular would stand to suffer under a hasty change of course by the ECB.

There is no question that the ECB under its new President Christine Lagarde is facing enormous challenges. In all major economies, central banks struggle to find the best way to operate near the lower bound. The ECB is by no means alone in this. That is the reason why there is controversy in the Governing Council, and that is precisely where this dispute belongs.

Twenty years after the launch of the euro, it would of course also be right and proper to ask where the architecture of economic and monetary union has proved its worth and where new solutions are needed. In this debate, the ECB must not be sacrosanct. But if we are prepared to change the Treaties in order to reform the ECB – and any changes to its mandate and toolbox would require such a change – then we should be prepared to open the discussion on all aspects of a reformed monetary union, from Eurobonds to debt rules and from deposit guarantee to a Eurozone Finance Minister. I suspect that particularly among the ECB critics, the willingness to engage in such a comprehensive reform debate would be rather limited. At least Helmut Kohl would have had the courage to do so.

Picture: CC ezb2014, Source: flickr