Posted by: Dirk | May 26, 2015

What exactly is the role of an inflation-targeting central bank?

I have always thought that an inflation-targeting central bank is independent because it follows a clear goal: get inflation to fall in line with the target in the medium term. What I cannot understand is what ECB and Bundesbank are doing. The NYT reports:

The European Central Bank has called on governments in the eurozone to clear away bureaucracy that burdens businesses and loosen rules on hiring and firing workers. The goal: bring down chronically high unemployment rates.

Sorry? How is it possible that with no major changes in “bureaucracy” Spain has seen its unemployment rate rise from below 10% to before the crisis to 23% today? Or did the case for more labor market flexibility exist before the crisis? After all, the country with one of the least flexible labor markets is Germany, which has an unemployment rate of 4.7% according to the NYT. As far as I can see, Germany did not institute any major reforms of the labor market since the crisis broke out. Actually, the country just introduced a minimum wage of €8,50 this year – and it is still growing! Does the ECB have a mandate to issue these kinds of statements?

The same goes for the Bundesbank. Deutsche Welle, run by the German government, reports:

Germany’s central bank has expressed its dissatisfaction with the reform process in Greece. In its latest monthly report, it said Athens would not be able to avoid bankruptcy without changing its course in negotiations.

Once again, I wonder where this is coming from. Does the Greek central bank in its monthly reports express its dissatisfaction with the reform process in Germany? After all, the country (Germany) has a net export surplus of more than 8%, which is completely against the rules. The Bundesbank does not say anything about this in its monthly report. However, Bundesbank president Weidmann is presented on the homepage with an interview by Handelsblatt. Weidmann complains that the German central bank, if perceived to shift the boundaries of monetary policy, will find it harder to fulfill its mandate. If he is the president of Bundesbank (which he clearly he is), how is that compatible with the statement on Greece in its latest report? How does “dissatisfaction with the reform process in Greece” fit with an inflation target of a little below 2%?

The euro zone, I argue, is a disaster because of the separation of fiscal and monetary. The ECB bails out banks, not governments. This leads to blackmailing sovereign governments into reforms that they would never have undertaken because the people would never have voted for austerity. The way that Germany handles its newfound power is destructive, imposing poverty and stagnation on the periphery. Central banks – ECB and national central banks – have found a new, enlarged role for themselves. I wonder whether the public benefits from this change.


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