Friday, September 6, 2013

Who Cares About Central Bank Independence?

In Germany politicians often talk about central bank independence, they profess that it is absolutely necessary in modern economics. But is that really true? A few examples:

Angela Merkel claimed in April that the ECB "would have to basically, probably (sic) increase the interest rate for Germany", while for other countries more liquidity is needed. Of course, this caused some trouble within the government; and both her spokesperson and the economics minister needed to point out that Germany is not interested in damaging the independence of the ECB.

Sadly, nobody in the German government deemed it necessary to actually look at the inflation rate in Germany, which is clearly and consistently below two percent, and the increase is mostly due to higher prices for groceries therefore the core inflation rate is and will be for some time around one percent. Also Germany is nowhere near full employment; 3.3 million workers in Germany are underemployed and 6.7 million want to work more, which unfortunately does not matter for the ECB, which only has to make sure that inflation remains close to but below two percent. So, not only did it look like an attack on central bank independence it was actually(, basically, probably) complete nonsense.

The episode went by without gaining much attention in the foreign media, so the German government did not look like total fools, and in the country the media also feels that the ECB should do something to help "the savers", and destroying the minimal growth we are currently experiencing in the eurozone by increasing the interest rate seems to be their solution. Social democrat, chancellor candidate and former finance minister Peer Steinbrück said in defense of the ECB:

"I find it puzzling that a head of government or any politician for that matter comments on monetary policy."

Then in June Merkel claimed: "we need to get back to an independent central bank policy and a policy of common sense." While at the same time speaking out against "the powers of the Fed". This did not go unnoticed, sadly.

Fast forward to August:  Peer Steinbrück is not a fan of not commenting on monetary policy anymore, also he somehow deemed it necessary to show that studying macro economics (he has) in Germany is a complete waste of time by declaring:
"That is an unspeakable situation [for the savers] so I am very sceptical about Mario Draghi's move to announce such a low interest rate policy - almost a policy of zero interest rates - for the ECB for the coming years,"
Of course, he is not alone with the assumption that the ECB should not worry about inflation and growth but instead should solely focus on German savers, who have their money in savings accounts. Merkels coalition partner the liberal democrats not only fear "creeping expropriation" of savers, they also want a veto power for the Bundesbank on all ECB decisions .

Merkel  at the G20 summit said the following three sentences, yesterday:
  • "It will be necessary that we also stepwise change the fairly loose monetary policy ."
  •  "We have to shape [the change] in a way that no cracks in the economic development take place." 
  • "Therefore, we need to make sure that the things happen in a coordinated manner."
German politicians across most parties do not care about central bank independence at all, also the constant push for higher base rates has nothing whatsoever to do with facts or even fearing hyperinflation.  German politicians use any random argument, like hyperinflation a few years back and today the poor savers in an "unspeakable situation". There is no economic doctrine much less science involved; it is just a gut feeling that now is the time to increase the base rate.

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