Rabobank chief economist calls for monetary financing by the ECB
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Rabobank chief economist calls for monetary financing by the ECB

Stresses are being felt closer to the core as investors pile into the recovery in the periphery of the eurozone.

On Friday, rating agency Standard & Poor’s cut its sovereign rating on the Netherlands from AAA to AA+, citing as its rationale: “The Netherlands’ growth prospects are now weaker than we had previously anticipated, and the real GDP per capita trend growth rate is lower than that of peers at similarly high levels of economic development.”

While bond markets were sanguine, with the yield on 10-year Dutch government bonds and their spread to German Bunds stable, economists are indeed worried.


Wim Boonstra, chief economist at Rabobank, chose not to respond directly to the rating agency’s decision, but rather issued a new warning that the eurozone’s woes are far from over, together with a plea to end the taboo on monetary financing by the ECB. This is his argument:

The eurozone badly needs a boost to growth. And with the deplorable state of government finances in most of its members, growth will have to come from monetary financing. It is time to debunk the taboo on this policy. We need to get rid of the taboo surrounding monetary financing.

“On Thursday, November 7, the ECB lowered its policy rate to 0.25% – its lowest rate ever. It was mainly the sharp drop in the pace of inflation in October that prompted the bank to take this step. The next step being talked about is the introduction of a negative deposit interest rate.

“However, by doing so, the policymakers will miss the mark altogether. Current monetary policy amounts to little more than pushing on a string. A further interest rate cut will mean even more of the same, thus failing to address the real problems.

“It is not my intention to criticize the ECB. Repeatedly, in recent years, it has sought the limits of its mandate to rescue the euro. The fact the euro still exists and the European economy is gradually picking up can be largely attributed to the ECB.

“One often hears concerns voiced about the potential inflationary nature of this policy. However, insufficient attention is being paid to the fact the eurozone has moved perilously close to deflation.

“Although the situation in southern Europe is gradually improving, the prospects for many of Europe’s unemployed remain dismal for the coming years. If unemployment rises to more than 20% of the working population, and half the region’s youth are out of work, there is only one remedy: a strong growth impetus.

“The best way to achieve this is through monetary financing, in view of the deplorable state of the government finances in the majority of the EMU member countries, combined with Germany’s unwillingness to function as Europe’s growth engine.

“Monetary financing in Europe is very much taboo. In effect, the ECB has been made responsible for maintaining price stability, without being in possession of a full set of instruments.

“With its current set of instruments, the Bank is capable of combating inflation, but it is poorly equipped to deal with deflation. This is understandable from a historical point of view, but has major disadvantages in the current situation.

“What we now need are monetary measures that translate directly into consumption and jobs, and that will bring the underlying inflation rate back to 2%, the ECB’s target rate. These measures could include the monetary financing of investment in infrastructure and sustainable energy supply.

“Of course, it is not up to the ECB to select which projects are to be financed. This is the job of governments or the European Investment Bank. Moreover, these should be infrastructural projects at European level that are clearly defined in terms of size and duration.

“But the decision-making competency regarding the extent of monetary financing should be the preserve of the ECB and not governments.

“I emphasize I am not calling for the monetary financing of Europe’s member states’ current government spending. If there is one lesson to be drawn from history, it is that that is the road to ruin.

“There is good reason for the fact that the central banks of Europe, including the ECB, have been removed from the sphere of everyday politics. Their independence is a valuable asset which should be cherished.

“But many wars have been lost and crises made worse by policymakers focusing on dealing with previous ones. The same is true now. Europe is having great difficulty in extricating itself from the recession, its unemployment rate is far too high and it is on the verge of deflation. So why should some forms of monetary financing still be a no-no?

There should be no taboo attached to the monetary financing of public investment spending. And the sooner this taboo is removed, the better – because the EMU’s problems are far from behind us.”

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