Brexit: European Central Bank has created a ‘BOMB’ according to an expert
Gabriel Makhlouf suggested the bloc’s approach was obsolete – warning that it needed a radical improvement if Brussels was to reach its 2050 target. And he feared the EU was not learning from recent crises, especially the one of the pandemic. Mr Makhlouf, who is governor of the Central Bank of Ireland, said a radical overhaul of EU economic policies was needed – stressing that the European Central Bank could not do all the work.
The EU has already suspended the fiscal rules of its Stability and Growth Pact, aimed at ensuring that EU27 members live within their means.
In addition, the ECB has launched a massive monetary support program based on its â¬ 1.85 trillion (Â£ 1.57 trillion) asset purchase program.
However, Makhlouf suggested that the ECB may need to extend emergency bond purchases in support of the private and public sectors under its Emergency Pandemic Purchase Program (PEPP) in the United States. -beyond the current deadline of March 2022.
He told Politico: âMonetary policy doesn’t work in a vacuum. Monetary policy needs friends.
âThe Stability and Growth Pact was essentially a creature conceived 30 years ago.
The President of the European Commission Ursula von der Leyen and the Irish Taoiseach, Micheal Martin
Gabriel Makhlouf is Governor of the Central Bank of Ireland
âThe question we all need to ask ourselves is whether this is the right plan for the next 30 years.
“We should take the opportunity over the next year to see how this can be improved.”
Mr Makhlouf, who was previously New Zealand’s Treasury Secretary and also worked as Gordon Brown’s private secretary when he was Chancellor of the Exchequer, said further thinking was needed, especially in light of the goals climate change in the EU.
He explained: âWe weren’t discussing 30 years ago the need to achieve net zero.
âBack then, we weren’t making these long-term commitments. Now we are.
“But we don’t spend enough time, as policy makers, thinking about the macro side in the long term.”
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Germany, led by Angela Merkel, renowned for fiscal discipline
Current fiscal rules put too much emphasis on balanced budgets and debt-to-GDP ratios, Makhlouf stressed, which he said was too restrictive an approach.
He said: “The composition of investment is as important as its absolute level as a proportion of GDP, especially when much of the economic activity will have to be done in a different way over the next 30 years to reach net zero. “
Debt sustainability should not be ignored – but becoming obsessed with debt has simply hampered the overall goal of improving economic well-being, Makhlouf said.
Mr Makhlouf also underlined the importance of cooperation between the members of the EU27.
He said: “It is important that we learn from the last two crises, the one we are in now and the one we have experienced over the past decade.
“One is that if fiscal and monetary policy works in a coordinated fashion, it ultimately benefits the community as a whole.”
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Micheal Martin photographed in Brussels
Christine Lagarde, President of the ECB
Makhlouf said it was important to recognize the trends of different EU countries – for example Germany with its fiscal conservatism and determination to balance the books.
He added, âWe need to make sure we think in the most creative way possible, about how to build a narrative that will support that direction.
âThose of us who are not part of this system need to help politicians develop a narrative that they can then use for the community at large.
“We need help so that monetary policy can work beyond the lower limit.”
The ECB has done its part, in his view, by lowering interest rates into negative territory and letting its balance sheet swell to 8 trillion euros. But these measures have not been enough to push inflation – sustainably – to its target rate of 2% for more than a decade – due to insufficient support from the budget side.
The pandemic has taken a huge look at EU-wide fiscal policy, with the rise of the most infectious strain currently sweeping the continent further complicating matters, Makhlouf acknowledged.
Mapping of factions in the EU budget
He said: âThe Delta variant obviously only increased the uncertainty.
âI would have been more confident a few months ago that we can end the program in March 2022 because I thought the pandemic emergency would be over.
“But today, compared to two months ago, it’s less clear.”
Nonetheless, he predicted that the current approach should get Europe out of recession while keeping inflation under control.
Mr Makhlouf said: “I am a big believer in patience in general. At present, our current monetary policy offers a sufficiently accommodative position to achieve our objectives.”
The next ECB policy meeting in September is expected to discuss the liquidation of the emergency program to avoid any sudden end of bond buying, Makhlouf said, stressing: âTalking about it is a completely different matter from whether we are going to make decisions.
The European Central Bank is in Frankfurt
âI don’t think if you end PEPP you have to find an equivalent increase elsewhere, because PEPP has a specific purpose.
âI believe in maintaining flexibility in all of our instruments, from interest rates to asset purchase programs and everything in between. Flexibility is very important to me. “
Mr Makhlouf also rejected suggestions for a split on the issue between member states.
He said: âThe more uncertainties we have, the more likely it is that people have different perspectives, see things in different ways.
âYou have a board of 25 people and all the people who will have a perspective on how the economy works, which prospects tell them.
âIt would be amazing if we all thought exactly the same way. In fact, it would be bad for the ECB and bad for Europe if we favored group thinking over diversity of thinking.