Merkel Advisory Panel Urges ECB to Phase Out Easing Earlier

  • Economy robust enough to handle refugees, German leader says
  • German report cites financial-stability risk of low rates

The European Central Bank should scale back or stop quantitative easing sooner than planned because governments alone can’t counter the side effects of its monetary policy, according to German Chancellor Angela Merkel’s council of economic advisers.

“Low interest rates pose risks for financial stability and erode the business models of banks and insurers over the medium term,” the panel of five leading economists said in its annual report Wednesday. “Relying only on macro-prudential regulation cannot solve these problems.”

The panel forecast that the German economy, Europe’s biggest, will expand by 1.7 percent this year and 1.6 percent in 2016. While a record influx of refugees will increase public spending by as much as 22.6 billion euros ($24 billion) in the two years, the federal government will be able to maintain a budget surplus, the report said.

“The fact that the economy is relatively robust right now is good news in the sense that we can tackle additional challenges better than if that were not the case,” Merkel said in Berlin as the economists presented the report.

The ECB’s government-bond purchasing program has led to “extremely low” interest-rate levels across all maturities as the central bank diverged from its earlier pattern of responding to changes in the euro-area economy, the advisers said. They reaffirmed the need for an insolvency mechanism for governments to bolster the “no bail-out” clause in the region’s rule book. 

Now, the ECB should “slow the expansion of its balance sheet or even end it sooner than announced,” the report said. ECB President Mario Draghi has said the asset purchases will run at least through September 2016.

The euro has fallen more than 5 percent since Draghi said on Oct. 22 that officials will reexamine their monetary stimulus program in December and that they’ve discussed cutting the bank’s deposit rate to boost inflation. Bank of Finland Governor Erkki Liikanen said Tuesday the ECB is willing to act using all instruments within its mandate, pushing the euro to a six-month low.

The advisers are Peter Bofinger, Isabel Schnabel, Lars Feld, Christoph Schmidt and Volker Wieland.

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