Posted by: Dirk | June 3, 2009

Merkel attacks the European Central Bank

German chancellor Angela Merkel has attacked the ECB, according to the FT:

Ms Merkel’s decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting on monetary policy out of respect for central bank independence – suggested Berlin is far more concerned about the ECB’s approach than has so far been apparent.

Meanwhile, Berlin is anxious that central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and fears the long-term inflationary potential of hyper-loose monetary policies.

As a German economist, let me reassure you: this is about politics, not economics. There a European elections on Sunday. On the other hand, I start to wonder who is advising Berlin (so, both the CDU and SPD). Germany reached inflation zero, unemployment in Europe is at its highest since the late 1990s, the small and medium firms complain in a letter to Merkel that the credit crunch will be lethal to many of them, and the response is talk about – inflation? And before that – sustainability of government debt? When it comes to action, Opel was rescued by government intervention. So, who are we going to save next? There seems to be a certain disconnect.

As I mentioned above, this weekend will bring elections. But afterwards, politicians will face German elections in September. I am pretty sure that we will not have economic policy that makes sense until after September 27 2009. That is bad news, since a lot of problems have to be tackled now. Saving the banking system (“bad banks”?), getting investment up (by expanding lending?), increasing demand (Konjunkturprogramm III), and what not. I don’t think all these measures will work, but we have to continually enhance our understanding of why we have this crisis and how we will solve it. (I will publish my views on this topic in the next few weeks.)


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