Geldpolitik und die Eurozone

„There is a borderline between monetary activities and quasi-fiscal monetization“: Comment by Jan Pieter Krahnen

While I broadly subscribe to what you and co-initiators have put down, I have two basic points to add. First, the text does not develop enough (for my taste, at least) the subtle and difficult issue of how to distinguish monetary from fiscal central bank policy. Second, it is surprisingly laxe in blaming national policy makers for not acting timely on what would imply a breakthrough-relief for ECB monetary action, namely the full-fledged Banking Union.

Because of these omissions, the text does not represent the academic debate in a balanced way which will make its refusal by the public (and interested parties) quite easy. In particular, the Constitutional Court (CC) will have little reason for considering the Call in their debate.

Let me explain my concerns in a few more lines, before suggesting an added paragraph to the text which tries to remedy the current weakness (and which will allow me to sign-in).

EXPLANATION 1: How to distinguish monetary from fiscal.

The key problem for the CC, in my opinion, is to gain an understanding about the borderline between monetary activities and quasi-fiscal monetization. Your text does not deal with this difficult issue, and in claiming that there is no such borderline at all, the current Call not only oversimplifies, it actually (unintentionally) works in the hands of those that put you in one camp (rather than representing academic debate).

Can we agree on where to draw the borderline? Harald Uhlig, for example, has advanced the idea that the borderline has been crossed if the pricing of bonds at issue is significantly determined by the buying power the ECB exerts on bond secondary markets, rather than the default risk of the issuer. In other words, as long as the prices at which the ECB purchases bonds in an OMT operation do not reflect implicit bailout subsidies, we can reject the claim that the ECB monetizes debt.

Of course I know that the empirical test is not easy, but here we economists may at least agree on a clear-cut and testable criterion.

EXPLANATION 2: The neglected role of policy makers

The debate about OMT in front of the German CC is convenient for policy makers in Berlin, Paris and some other places, because it focuses the attention on the ECB rather than on themselves. Their super-urgent job is to conclude the legal framework of a banking union, and to make it operational. Only then will the ECB be relieved of its dual role of monetary policy agent, and stabilizer of the banking system, being able again to concentrate on the first one only.

It is an infamy to blame the ECB for its OMT program and, at the same time, not to acknowledge that the stabilization of the banking system (with possible indirect consequences for fiscal policies) has been handed over to the LOLR, while a reliable and credible framework for private liabilities in the banking system has still not been put in place.

SUGGESTION: adding the following two paragraphs

1. (after paragraph 9 which ends „…including for Germany“)

„The critical borderline between monetary action and monetization of state debt, which is at the heart of the debate in front of the CC, can be gauged from the price impact of central bank bond purchases. This criterion may be useful to distinguish between sheer monetary operations, and those that may have fiscal side effects. As a result, there is no economic sound reason to hinder any central bank in announcing an OMT program, provided it respects a well-defined borderline between monetary and fiscal operations.“

2. (adding to the current final paragraph)

„In particular, we see the current debate about OMT as diverting pressure away from badly needed policy action. The underlying reason for the important role now played by the ECB (and OMT) in stabilizing the European banking system is the absence of reliable and credible framework for private liabilities and bail-in in the banking system. The relevant policy options relating to a complete banking union are on the table. Their implementation has repeatedly been upheld by national reservations. Blame these policy preventers, not ECB’s OMT.“


Prof. Dr. Jan Pieter Krahnen,

Professor of Finance, Goethe Universität Frankfurt

 

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