“Keep prices stable” Interview in the Badische Zeitung
Do you have a bust of Walter Eucken in your office? Or a portrait of him hanging on your wall, perhaps?
Not quite. You will find Eucken’s magnum opus on my bookshelf, though. It shaped my economic thinking. Time and again, I find myself quoting one of his especially concise observations: “Whoever reaps the benefits must also bear the liability.” When this principle applies, people make responsible decisions. Eucken declared it to be a cornerstone of our economic system. It ought to be a pillar of European monetary union, too.
To what extent have Eucken and the Freiburg School influenced the Bundesbank? Have they had an effect that can still be felt today?
Walter Eucken experienced hyperinflation and the Great Depression first hand. Price stability was extremely important to him. Ultimately, we as central bankers are putting a significant number of his ideas into practice today. After all, our main task as monetary policymakers in the euro area is to keep prices stable.
Can your colleagues at the European Central Bank (ECB) make any sense of the Freiburg School’s concept of “Ordnungspolitik”? Or do they just understand it to mean saving and higher interest rates?
It’s certainly worth making the case for Eucken’s understanding of the idea: namely that the government shapes the economic order but does not steer the economy. Equating “Ordnungspolitik” with saving, higher interest rates and harping on about principles would be a travesty. It’s not about sticking to rules for their own sake. It’s about having a functioning and humane economic system. That is Eucken’s legacy.
What do you expect to see from the reshuffled ECB Executive Board, with Christine Lagarde at the helm and German economics professor Isabel Schnabel?
Christine Lagarde doesn’t just want to talk to experts, she wants to engage more with representatives from all walks of life. I see this as a good thing. I also welcome the fact that discussions in the ECB Governing Council have become more open. We recently announced that we would be launching a review of our monetary policy strategy in light of the lessons learned over the past few years. We are also scrutinising the effects and discussing the side effects of our measures, such as government bond purchases. It is precisely these side effects that I’ve been pointing out for a while now.
Where will monetary policy go next? Does the ECB need to keep purchasing assets on such a generous scale? Is there an end in sight to zero interest rate policy?
Last September, the ECB Governing Council further eased monetary policy with an extensive set of measures. I don’t believe that this package was needed on such a scale. As you know, I take a critical view of the package’s additional asset purchases, in particular. And some of my colleagues shared this criticism. What we on the Governing Council are agreed on, however, is that support in the form of accommodative monetary policy is still needed. That’s because inflation in the euro area as a whole is likely to remain below target over the next few years.
How much longer do savers have to live with low interest rates, and banks with negative ones?
I’m well aware that savers are feeling frustrated. But accommodative monetary policy is having a broader impact. And looking at the complete picture, you will also see that anyone wishing to take out a loan can currently take advantage of low borrowing rates. Lower interest payments are also taking pressure off public coffers. All in all, low interest rates are supporting the economy and, in this way, are contributing to employment, higher wages as well as higher pensions. It’s clear to me that the very low interest rates cannot be permitted to persist indefinitely. Given the price outlook, though, we need to stay realistic: it will probably take a while for interest rates to pick up again. Low interest rates on the capital market are also being driven by long-term real economic developments, such as the progressive ageing of the population, which are pushing down the interest rate level.
ECB President Christine Lagarde has vowed to put climate change on the ECB’s agenda. You view this with some scepticism. Why?
Climate action is one of the most pressing issues of our time. That said, it’s the job of elected parliaments and governments to make decisions relating to climate policy. By that I mean instruments such as, for example, putting a price on CO2 emissions – with all the ramifications that this entails for the environment, consumers and businesses. What we need to concern ourselves with as monetary policymakers is how we can better integrate climate change and climate policy into our analyses. Another question I believe we need to ask ourselves, however, is the extent to which the assets we purchase come with financial risks arising from climate change. Such considerations are part of the strategic review launched by the ECB Governing Council. This was kicked off by Christine Lagarde – and rightly so, in my opinion.
Would Eucken be able to understand the monetary policy the ECB is currently pursuing? Given the stable prices in the euro area, he would surely be delighted by it, don’t you think?
The euro has a proven track record as a stable currency. I have no doubt that Eucken would be happy with price developments in the euro area. He would surely also approve of the ECB’s clear focus on the objective of price stability. What's more, he inherently recognised the danger of monetary and fiscal policy becoming too closely intertwined. For that reason, I suspect that Eucken, too, would be critical of the Eurosystem’s extensive government bond purchases.
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