Former European Central Bank chief economist Juergen Stark said President Mario Draghi’s bond-purchase plan compromises the bank’s independence and risks eroding its credibility to contain inflation.
“I share those views which argue this is not monetary policy anymore,” Stark said in an interview on Bloomberg Television from Frankfurt today. Making the ECB’s purchases contingent on governments fulfilling certain conditions “undermines monetary policy, it undermines the independence of a central bank,” he said.
Draghi proposes to intervene in debt markets to lower borrowing costs and restore transmission of ECB policy only in countries that apply for financial aid and sign up to conditions. The plan, which has yet to be activated, was opposed by Germany’s Bundesbank, where Stark was once vice president.
Stark, who resigned from the ECB at the end of last year over the bank’s previous bond-purchase program, was particularly critical of the conditionality of the new plan, which he said was introduced as a compromise.
“To make interventions conditional on policy reforms in individual countries in my view changes the name of the game,” Stark said. “This is not monetary policy any more. If the monetary policy transmission mechanism is impaired, the central bank should intervene” and “should never make its own decisions dependent on the behavior of third parties.”
Stark said the Bundesbank’s influence at the ECB has not diminished and perceptions of the situation will change if the bond purchases “lead to an explosion of the ECB’s balance sheet and increasing inflationary risks.”
No Gold Link
“We shouldn’t forget that with central banking in the current situation, there’s no link anymore of money to raw material, gold,” he said. “The only anchor for price stability, to keep the value of money, is the credibility and independence of the central bank.”
Stark also said the ECB is not the right institution to supervise all 6,000 banks in the euro area because of the risk that it will conflict with monetary policy.
Asked about Greece, he said the reform program is off track and the best way to deal with the situation is to give the country more time to meet its targets.
Stark also said the ECB’s Executive Board should eventually be expanded to nine seats from six, which “will change in relative terms the weight given to individual central bankers.”