The gulf that divides economic theorists on how to respond to the euro area’s travails isn’t getting any narrower.
Last week, the German Council of Economic Experts argued that the level of monetary support provided to the 19-nation currency bloc by the European Central Bank is no longer warranted, and urged policy makers to taper bond purchases quickly. Now, the U.K.-based Centre for Macroeconomics has published a survey of European economists who, for the most part, argue precisely the opposite.
Out of 64 respondents – including former Bank of England Deputy Governor Charles Bean and Nobel Prize-winning economist Christopher Pissarides, the CFM’s chair – 78 percent either disagreed or disagreed strongly with the proposition that ECB policy is no longer appropriate. Whereas the German government advisers said the region’s recovery is now strong enough to live without so much stimulus, many of the survey respondents argued that unemployment is still too high, inflation too low and growth too fragile for any dialing down of support.
“The ECB’s policy stance seems to me to be entirely warranted,” Bean said in his response. “I would prefer to see more of the burden in sustaining aggregate demand being shouldered by fiscal policy, especially in Germany.”
In other words, the two sides in the war of ideas over the euro crisis are still lobbing blame grenades at each other from the trenches, and the skirmishes are becoming more serious. While the German school has emphasized fiscal austerity and structural reform – Germany’s on track for a budget surplus this year – the anti-austerity economists have argued for more economic support and looser monetary policy to bolster demand.
A key contention of German critics of ECB policy now is that while the recovery slowly gains pace, the 80 billion euros ($88 billion) a month of asset purchases plus the negative interest-rate policy are actually giving governments too much comfort. Were monetary policy to be tighter, so the assertion goes, politicians would be forced more quickly to make their economies more competitive.
That’s an issue on which the surveyed economists were less certain. To the question “Do you agree that the ECB’s monetary policy masks structural problems of member states?,” 28 percent agreed, against 31 percent disagreeing. That may suggest that even though some observers might believe ECB stimulus lets governments off the hook, it is still worth having because of the weakness of the economy.
“The eurozone is still in disarray over many things, such as banking union, high unemployment in most countries, lack of fiscal cooperation and many others,” Pissarides said in his response. “Loose monetary policy helps a little so lets have it. But what is more urgent is for Germany to pay more attention to the needs of the whole of the euro zone and stop trying to get monetary policy to move in the austerity direction too.”