Perilous ECB Balancing Act

J. Soedradjad Djiwandono
J. Soedradjad Djiwandono, Emeritus Professor of Economics, Faculty of Economics and Business, Universitas Indonesia, and Adjunct Professor of International Economics, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore.

As a tool of monetary policy, this is in fact nothing new, but rather a variation of what in the Nineties was known as “The Greenspan Put”: a policy to enable heavily in debted economies to keep afloat, by guaranteeing bond sales with ECB financing. It reveals how only a more robust economy, like that of Germany, can afford to consistently abide by a prudent monetary policy, and never needs such a guarantee. 

As of this writing, the policy seems to be effective. While Fed Chief Jerome Powell and ECB Head Christian Laggard are both bank lawyers and not monetary experts, they have proven adept at stabilizing both economic and financial crises in the US and the EU. These are certainly good lessons which monetary economists like this writer should be willing to accept and apply, to avoid any repetition. Politically, they are examples of the wise decision by President Joe Biden to refrain from replacing Jerome Powell as Head of the Fed, and Christian Laggard not to run for political office in France. The opposite might be the case for Mario Draghi, reluctant to assume the premiership in Italy, an experience that ultimately ended in his resignation. We should better remember Mario Draghi as the ECP President who, with firm conviction in his monetary expertise, successfully calmed the EU markets, vowing to do “whatever it takes” to rescue the Euro from its downward spiral; in the event, he was successful in doing so. 

Even though the problems are not necessarily comparable, there are certainly good lessons to be learned by central bankers, particularly for the Bank of England and the Bank of Japan, both facing crises: the U.K. was mired in an economic recession, when the need to deal with surging inflation arose after the Russia-Ukraine war exacerbated the issue, with devastating economic and financial implications. Governor Andrew Bailey of the BoE did exactly what needed to be done, when he learned that inflationary pressure on the UK economy threatened to mash it further into a recession. The Bank of Japan faced the same challenge, with an economy already long suffering in a recession. The steady hands of BOJ Governor Haruko Kuroda were tested, as inflationary pressure loomed for the island nation. He approached the issue resolutely and his efforts have yielded positive results. Certainly, his previous 5 years of experience as Head of the Asian Development Bank (ADB) steeled him for the job as BOJ Governor.