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Power Or Economic Law? Fresh Reflections on ECB Policy A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Holtfrerich, Carl-Ludwig Article Power or Economic Law? Fresh Reflections on ECB Policy Intereconomics Suggested Citation: Holtfrerich, Carl-Ludwig (2018) : Power or Economic Law? Fresh Reflections on ECB Policy, Intereconomics, ISSN 1613-964X, Springer, Heidelberg, Vol. 53, Iss. 3, pp. 164-169, http://dx.doi.org/10.1007/s10272-018-0742-7 This Version is available at: http://hdl.handle.net/10419/213171 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Monetary Policy DOI: 10.1007/s10272-018-0742-7 Carl-Ludwig Holtfrerich* Power or Economic Law? Fresh Refl ections on ECB Policy Conventional wisdom says that central banks determine interest rate levels. After all, monetary policy set by central banks directly infl uences money market conditions. But these conditions are also shaped by other actors such as government, manufacturing businesses, commercial banks and non-bank fi nancial institutions, as well as by monetary developments abroad. In this paper, it is argued that market forces, such as a global saving glut, play a more important role in setting interest rates than central banks. Eugen von Böhm-Bawerk’s classic 1914 article Macht oder especially in Germany. The German public, journalists ökonomisches Gesetz? presented a treatise which, using and mainstream economists in academia, think tanks and the wage level as an example, can be summarised as fol- the fi nancial sector have attacked ECB President Mario lows: The range of power of private associations such as Draghi for executing these policies. They argue that they trade unions and, one might add, public institutions like will erode private savings and old-age provisions and will central banks is quite considerable in the short run;1 in the lead to bubbles in the equity and real estate markets, to long run, however, it strongly shrinks “in favour of what is misdirected investments, to liquidity or solvency prob- subjected to economic laws or rather economic logic.”2 The lems in the fi nancial sector and to even looser fi scal poli- question today is whether it is the European Central Bank’s cies in those eurozone countries that already violate the power or rather market forces that determine the level of Maastricht criteria. Schnabl goes so far as to argue that interest rates, which since the 1990s have been falling and Draghi’s monetary policy is undermining the economic are nowadays very low. The conventional wisdom is that order of Germany, as devised by Walter Eucken.3 central banks alone control interest rates. I will present evi- dence that market forces play a more important role. It is well known that the German Bundesbank is opposed to Draghi’s monetary policy programme. Current Bundes- The ECB’s current monetary policy of setting low and even bank President Jens Weidmann and his predecessor Axel negative interest rates, along with its open-market policy Weber have been outvoted in the ECB Governing Coun- of quantitative easing (QE), have met with strong criticism, cil many times, as has the German member of the ECB Executive Board, Jürgen Stark. Indeed, both Weber and * This is a slightly revised version of the paper that I presented in the Stark resigned in protest in 2011.4 session on “The Future of the Eurozone” at the Annual Conference of the Institute for New Economic Thinking (INET) in Edinburgh, Scot- land, 21-23 October 2017. Even leading government members, such as former 1 E. von Böhm-Bawerk: Macht oder ökonomisches Gesetz?, in: fi nance minister Wolfgang Schäuble, have labelled Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, Vol. 23, Draghi’s monetary policy as dangerous and have pushed 1914, pp. 205-271. For an early detailed review of Böhm-Bawerk’s ar- 5 ticle, see J. Bonar: Macht Oder Ökonomisches Gesetz? by Eugen v. for a tighter policy since at least spring of 2016. This is Böhm-Bawerk, in: The Economic Journal, Vol. 30, No. 118, 1920, pp. 214-219. Incidentally, Böhm-Bawerk is one of the fathers of mod- ern theories of capital and capital markets. 3 G. Schnabl: Folgen der Geldpolitik. Die EZB unterhöhlt die Grund- 2 My translation of E. Heuss: Macht oder ökonomisches Gesetz, in: pfeiler unserer Wirtschaftsordnung, FOCUS-MONEY online, 4 Sep- Zeitschrift für die gesamte Staatswissenschaft / Journal of Institution- tember 2017, available at http://www.focus.de/fi nanzen/experten/ al and Theoretical Economics, Vol. 128, No. 2, 1972, pp. 185-195, here folgen-der-geldpolitik-die-ezb-unterhoehlt-die-grundpfeiler-unserer- p. 185. Heuss devotes his article to defi ning what power in Böhm- wirtschaftsordnung_id_7382123.html. Bawerk’s use of the word means in economic, political and social re- 4 P. Müller, C. Pauly, C. Reiermann: ECB Chief Economist Quits. lations. Jürgen Stark’s Resignation Is Setback for Merkel, Spiegel Online, 12 September 2011, available at http://www.spiegel.de/international/ europe/ecb-chief-economist-quits-juergen-stark-s-resignation-is- setback-for-merkel-a-785668.html. Carl-Ludwig Holtfrerich, Freie Universität Berlin, 5 H. Göbel: Schäuble will höhere Zinsen, Frankfurter Allgemeine Zeitung, 11 April 2014, available at http://www.faz.net/aktuell/ Germany. wirtschaft/wolfgang-schaeuble-kirtisiert-mario-draghis-ezb-geld- politik-14171118.html. Intereconomics 2018 | 3 164 Monetary Policy somewhat ironic, as it was the German government that lic opinion – governments, Germany has long maintained successfully insisted on the ECB’s independence from very high savings and very low net investment ratios. As government infl uence. a result, the country has been running current account surpluses since 2002, surpluses which began to rap- Millions of Germans live in fear of the consequences of idly increase in 2004, reaching a record 8.5% of GDP in Draghi’s monetary policy, while Draghi has spoken of the 2015. This has since tapered off slightly, falling to a still “perverse angst” among Germans regarding his policy high 8.1% in 2017. These surpluses are a strong impedi- decisions.6 The often stoked fear of infl ation, even hyper- ment to economic recovery processes in euro area defi - infl ation, as a consequence of the ECB’s fl ood of liquid- cit countries, and they are a threat to balanced economic ity into money and capital markets has not at all been development within the eurozone. Germany’s high current substantiated by price developments. Increases in the account surpluses constitute an incentive in defi cit coun- cost-of-living index have remained well below the price- tries to cut currency ties with the most competitive euro- stability target of under – but close to – two per cent p.a. zone member state and return to a national currency. The same is more or less true for Japan and the US. The expansion of the balance sheets of their respective cen- There is a strong belief in Germany, as well as in other eu- tral banks has been even more pronounced than that of rozone countries, in the UK and in the US, that the level of the ECB. interest rates is determined solely by the decisions made by central banks, as if the ECB or any other central bank The other side of the coin – cheap credit for investment could wield absolute power over the conditions in money purposes or real-estate fi nance – is not discussed, and and capital markets. Markus C. Kerber, a practicing at- certainly not complained about by those in Germany who torney at law and adjunct professor of public fi nance and make use of and benefi t from it. The fall of interest rates economic policy at the Technische Universität Berlin, ex- has redistributed income from creditors to debtors. Hy- plicitly called the ECB a “sovereign dictator” in his state- perinfl ation has the same effect, only much more quickly ment before the German Constitutional Court questioning and strongly. The common denominator is uncertainty, the constitutionality of the ECB corporate sector purchase presently with regards to future nominal interest rates and programme as an extension of the QE programme.9 in case of hyperinfl ation with regards to future real interest rates.7 It is textbook knowledge that the monetary policy set by central banks has direct infl uence on money market con- According to regular Eurobarometer polls carried out by ditions. But these conditions are also shaped by other ac- the European Commission, Germans are much more risk- tors within the domestic economy, such as government, and debt-averse than citizens of other EU member states private manufacturing businesses, non-bank fi nancial in- with a long tradition in international commerce and trade, stitutions and commercial banks, as well as by monetary namely Italy, Spain, Portugal, France, the Netherlands and developments abroad. Depending on its fi scal policy, a England.8 I consciously speak of England, not of the UK, government can, for example, demand short-term funds because Scotland, as part of the latter, is the proverbial from the money market in defi cit situations or add to the land of penny pinchers and savers, not of risk-takers and supply of these funds in surplus situations.
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