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3rd Jul 2022

ECB putting eurozone economy at risk, German expert group says

  • The European Central Bank's quantitive easing programme 'risks the eurozone's health', a German expert group says (Photo: Valentina Pop)

The European Central Bank's (ECB) plans to pump more cheap credit into banks risk undermining the long-term health of the eurozone, according to Germany's leading economic expert group.

The ECB's "extensive quantitative easing measures" posed "risks for long-term economic growth in the euro area, not least by dampening the member states' willingness to implement reforms and consolidate their public finances", the German Council of Economic Experts (GCEE) said in its annual report, published on Wednesday (12 November).

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The report added that the ECB "should avoid massively expanding its balance sheet as long as it does not forecast deflation in the euro area."

The report is the latest German warning shot to be aimed in the direction of Mario Draghi's ECB, which has started to pump more money into the economy in a bid to stimulate greater financial activity.

The Bundesbank is also uncomfortable about the ECB's increasingly activist role in the bond and securities markets.

Although the report is not legally binding, the GCEE is responsible for advising the German government and Bundestag on economic affairs. Angela Merkel's government is required to give a formal reply to the report within two months.

But the German call for the Frankfurt-based bank to limit its intervention remains a minority position.

Most governments in and outside the eurozone, together with the International Monetary Fund, want the ECB to provide increased monetary stimulus.

Last week the Organisation for Economic Co-operation and Development (OECD) also urged the bank to "employ all monetary, fiscal and structural reform policies at their disposal” to stimulate growth in the currency bloc, including a "commitment to sizeable asset purchases (“quantitative easing”) until inflation is back on track".

The ECB plans to increase its balance sheet by €1 trillion over the next two years, taking its liabilities to around €4 billion, similar to levels seen in 2011 and 2012 at the height of the eurozone crisis.

This autumn the ECB launched programmes to buy packaged loans and private bonds as well as a new two-year scheme offering cheap money to banks if they promise to increase their lending to European businesses.

But Draghi has hinted that the ECB is prepared to go further if the eurozone economy remains stagnant and in danger of deflation, telling reporters following the monthly meeting of the ECB's governing council last week that there was unanimous agreement to use "additional unconventional instruments" if needed.

Meanwhile, the GCEE also called for a change to the EU treaties to allow responsibility for banking supervision to be taken out of the hands of the ECB.

Changing the treaties "would make it possible to create a European banking supervisory authority that would be institutionally separate from monetary policy and would allow for more effective bank resolution", the report says.

The so-called Single Supervisory Mechanism (SSM), which is run under the ECB's auspices and supervises more than 100 of the largest banks in the eurozone, came into force last week.

Critics of the regime argue that charging the ECB with bank supervision could create conflicts of interest with its main function of maintaining price stability.

But for its part, the ECB says that there is clear demarcation between its different functions.

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