15th Apr 2024


Are ECB economists a 'tribe' or 'violinists'?

  • A recent survey suggested ECB employees did not like Christine Lagarde very much (Photo: European Central Bank)
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This week, the former deputy governor of the Irish Central Bank, Stefan Gerlach, compared economists at the European Central Bank to violinists.

He did this in response to a widely remarked-upon comment by ECB president Christine Lagarde, who — when speaking at the World Economic Forum in Davos last weekend — compared economists with a "tribal clique."

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This was followed by an internal ECB survey that suggested her own employees did not like Lagarde very much, which then descended into a pile-on on social media , where many of her peers judged her original words misplaced.

"It is not a good idea to insult people who work for you," Gerlach wrote on X. "If I were asked to conduct the Vienna Philharmonic having no background in music or conducting, I would decidedly not refer to the violinists as a tribe."

Listen to the music

Whatever you think of Lagarde's remark itself, comparing ECB economists with violinists is amusing.

If economists indeed were violinists, perhaps they would have picked up on the vibe that there are alternatives to carpet bombing the economy back to the baseline of two percent inflation — at the cost of real wages, a credit crunch and, possibly, a recession.

To be clear: interest rates are the bank's most powerful tool to lower demand by increasing the cost of borrowing.

It reduces overall economic activity, eventually decreasing the number of jobs, which worsens the bargaining power of workers, resulting in lower wages and, thus, less buying.

It is effective if inflation is caused by too much buying — or, as classical monetary theory would have it: "if too much money is chasing too few goods."

But it has been abundantly clear that inflation in Europe in 2022 and 2023 was caused by supply shocks in shipping, energy and food and had nothing to do with consumers buying too much stuff.

Of course, less supply means more money chasing fewer goods.

But the point is that attacking imported price increases by killing domestic demand is a clumsy, incredibly indirect and economically damaging way to address the problem.

Lagarde herself has repeatedly said inflation was caused by the rise of imported energy and food prices, which are "not addressed by interest rates."

Simply said, bankrupting the populace to reduce the price of peanut butter may not be the way to go.

Many inflations, only one tool?

Meanwhile, on Thursday (25 January), the ECB's governing council decided to keep interest rates high, at four percent (up from a previous minus 0.5 percent) for the foreseeable future, despite a looming recession, to prevent the feared return of inflation due to rising wages.

"Tight financing conditions are dampening demand, and this is helping to push down inflation," the bank announced in a press release.

The question is if it is reasonable to keep shifting the cost of inflation on workers. It has been clear from the start that what's driven inflation wasn't wages but corporate profits. Even Lagarde herself has said so.

The European Central Bank, the OECD, the Bank for International Settlements (BIS), and the European Commission have all published studies showing that profits have accounted for most of the inflation.

Even before the bank started raising rates in May 2022, chief ECB economist Isabel Schnabel suggested as much when she said that "consumers, rather than shareholders, have borne the brunt of the inflationary shock" because "firms could expand their profits."

"Large corporations have learned that they do not have to pick up the bill for big cost shocks like the pandemic or the energy crisis following the Russian invasion of Ukraine," wrote the economist Isabella Weber in an article on Project-Syndicate last year.

"Like big banks during the 2008 financial crisis, they have been folded into the culture of bailouts and buck-passing," she added.

In the last year and a half, Weber has produced a body of work suggesting that supply-side inflation and inflation caused by profiteering — or 'sellers inflation' as she describes it — can be targeted by other, less damaging means.

For example, by imposing price controls on certain goods, foods or gas. Spain is a case in point.

By capping gas in the electricity market, limiting the gas price for consumers in the regulated tariff, lowering indirect taxes, or giving discounts for vulnerable households, Spanish inflation was among the lowest in Europe.

On the other hand, "keeping interest rates high is a strategy to shift the cost of inflation on workers by suppressing wages, and on social programmes through social programmes and on to future generations by discouraging investment," wrote Weber.

This especially weighs down green investments, as EUobserver previously reported.

So why does the bank continue on a path with many destructive side effects?

Lagarde was probably on to something when she said, "'Groupthink' among economists "doesn't work."

"If we would have more climate scientists in the bank," she added, "I think we would now be in a better place."

In other words, if economists truly were violinists, they might have chosen music that fit the mood. Instead, they insist on repeating the same old tune. Rather like pumpjacks reciprocating in an oil well.

The ECB will next decide on interest rates in March.


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