The ECB ‘accidentally’ followed IMF‘s policy advice for growth and job creation by printing more money

A close embrace between Jeroen Dijsselbloem, President of the Eurogroup and Christine Lagarde, Managing Director of the IMF (from left to right). So close yet so far apart, after the IMF started criticizing Eurozone about fiscal and incomes austerity and an overleveraged banking sector. (The Council of the European Union, 8/7/2013).

A close embrace between Jeroen Dijsselbloem, President of the Eurogroup and Christine Lagarde, Managing Director of the IMF (from left to right). So close yet so far apart, after the IMF started criticizing Eurozone about fiscal and incomes austerity and an overleveraged banking sector. (The Council of the European Union, 8/7/2013).

Christine Lagarde, Managing Director of the International Monetary Fund, speaking in Washington DC last Wednesday 2 April stressed that the world economy, in the aftermath of the Great Recession of 2008-2012, faces a long period of slow and sub-par growth, “well below the solid, sustainable growth that is needed to create enough jobs and improve living standards into the future”. After acknowledging that the developing countries shouldered global economic growth during the last crisis, she observed that today the developed world and more so Eurozone, abstain from fighting its own disinflation and weak growth and consequently do not help the rest of the international economy reach a strong and sustainable upwards path.

In detail, Lagarde delivered a speech in the School of Advanced International Studies in Washington D.C., entitled “The Road to Sustainable Global Growth—the Policy Agenda”. Focusing on the policies followed in the developed world, comprising the US and the Eurozone, she noted that the US has attained a strong growth path supported by measures, favoring a “robust private demand and the easing of the short-term fiscal adjustment”. The only advice she had for the American decision makers was that for the US “it will be critical to continue to carefully manage the gradual withdrawal of monetary support by the Fed, and to put in place a durable medium-term fiscal plan”.

A lot to say about Eurozone

When it came to the Eurozone she had a lot to say. For one thing, she acknowledged that the recent decision to create the European Banking Union was a long awaited step forward, but she added that, “the IMF has been urging for some time” to this direction. In view of the ‘nationalisation’ of the eventual financial liabilities that the EU has decided in relation to possible banks resolutions, she bitterly noted that “Implementing a common fiscal backstop remains key (in winding down a bank), as is the upcoming asset quality review of banks”.

Lagarde had a lot more to criticize Eurozone for. The dangerous fall of the inflation rate below 1% was at the center of her criticism. Not to forget though that Mario Draghi, the President of the European Central Bank, shares the view that the fall of euro area inflation below the 1% benchmark brought the single money zone to the “dangerous area”. IMF’s head had more to add on Eurozone’s fast falling inflation. Actually she called it, the “first obstacle” to attaining a sustainable global growth path more rapidly.

She stressed, “The first obstacle is in the advanced economies. There is the emerging risk of what I call “low-flation,” particularly in the Euro Area. A potentially prolonged period of low inflation can suppress demand and output—and suppress growth and jobs. More monetary easing, including through unconventional measures, is needed in the Euro Area to raise the prospects of achieving the ECB’s price stability objective”.

Interesting timing

The timing of this Lagarde’s ‘advise’ is very interesting. The very next day, Thursday 3 April, Mario Draghi, speaking after the usual monthly meeting of ECB’s Governing Council, announced exactly what IMF’s head had suggested the previous day that is “More monetary easing, including through unconventional measures”.

At this point, it must be reminded what Draghi exactly had said last Thursday. He already knew then that Eurostat, the EU statistical service, had estimated the March inflation as low as 0.5%, far below ECB’s target, set at below but close to 2%. Given that, he stated last Thursday that “A cross-check with the signals from the monetary analysis confirms the picture of subdued underlying price pressures in the euro area over the medium term”. This was a worrisome statement, because Draghi himself has termed the area below 1% as a dangerous region.

With all this knowledge, last week the President of ECB confirmed that the central bank’s Governing Council was unanimous over the possibility of adopting further quantitative easing and unconventional monetary measures. In plain English this means the ECB is ready to start printing money, in order to save Eurozone from the current disinflation stage (falling inflation), which may lead to deflation (negative inflation, falling prices) and long term stagnation or even recession.

The ECB ready to act

The interesting thing is that the two German members of ECB’s Governing Council were in favour of these new monetary policy measures. This means that Berlin gradually changes its long time policy against supporting the real economy with monetary measures. To be noted though, that all the developed economies, including the US, Britain and Japan use extraordinary monetary policies to support growth in the real economy.

To this effect, Draghi last Thursday stated that, “We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy, the high degree of unutilised capacity and subdued money and credit creation. At the same time, we are closely following developments on money markets. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation”.

Without saying it, Draghi actually announced that Eurozone will do exactly what all the other developed economies are doing; print money in order to help the real economy grow faster. The fact that Lagarde had advised the same policy the very previous day, is of course a coincidence. Actually ECB’s new policy announcement within 24 hours rendered the IMF’s advice quite obsolete.

All in all, this coincidence means that the ECB is not in close cooperation with the IMF, as far as the exact timing of policy decisions is concerned. This doesn’t exclude the possibility that Lagarde knew what the ECB was about to decide the next day. Secondly, and most importantly though, it becomes clear that the European Central Bank will finally do what all the other central banks are doing to support job creation.

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