US and EU central bank policies causing economic uncertainty

MONETARY policy has been the key area in which policymaking has tried to confront the world’s financial crisis. There is no doubt that Ben Bernanke, chairman of the United States’ Federal Reserve, and Mario Draghi, president of the European Central Bank, have been the main actors. Although central bankers are not entirely free from political pressures, it is undeniable that reckless commercial banks, daring investors, and irresponsible governments have depended on the central bankers for their survival during the past five years. It may be too early to draw conclusions and to evaluate the outcome of the monetary strategies which have characterised both sides of the Atlantic. Yet, two general comments are in order. The first concerns the different approaches adopted in Washington and Frankfurt. Financial services firm Lehman Brothers declared bankruptcy in September 2008 creating panic at the Fed and the ECB. And while they let the Lehman Brothers bank sink, central bankers claimed that ‘everything was under control’. Yet, after those moments of confusion, the Fed made no mystery about its subsequent moves: it would print all the money necessary to bail out those actors that were simply too big to fail. The list of those too-big-to-fail included the American government, government agencies and all the big banks. The ECB, contrastingly, was grappling with a more difficult task. It had to negotiate a compromise between its own charter - under which bailout programmes are forbidden - and political pressure and expectations according to which the euro is also an instrument to enhance European cohesion and consensus. The outcome has been utter confusion. European authorities have continued to declare that monetary discipline and price stability are uninfringeable constraints, but they have been printing inordinate amounts of euros. They have therefore bailed out banks and over-indebted governments, and they have also prevented other critical situations from deteriorating by announcing they will be even more generous in printing money - if necessary. The second comment regards the fact both Mr Bernanke and Mr Draghi have let it be known that they plan to revise their monetary policies as soon as they can. Although the timing of what this means is a little mysterious, one can make some guesses: Mr Bernanke will probably take action when US unemployment is no longer a problem, while Mr Draghi will watch inflation, and possibly real growth, to appease politicians. In other words, printing money will slow down or stop in the US when unemployment drops to about six per cent, and when inflation falls below three per cent in the eurozone. Markets are delighted in the short run but also very prudent from a long-run perspective. The short-run euphoria is due to the presence of abundant liquidity. The long-run prudence relates to the lack of trust in the central bankers’ ability to handle the end of the era of easy-money, especially in Europe. The ECB, in contrast with the Fed, has often sent out contradictory messages, and the public hardly knows what the next step might be. It is widely perceived that the central bankers might change tack before the end of 2013 if inflation speeds up. Statistics about the price level are followed with increasing apprehension and everybody hopes - Mr Draghi possibly more than anyone - that when the big decision must be made, growth in the Western world will be significant. Rising general apprehension, uncertainty and volatility have increased. It is now obvious that generous monetary policy has failed to provide a prompt recovery. The Americans were expecting to bounce back with a growth rate around four per cent a year in 2012 and 2013. They are now experiencing recovery at half that speed. The Europeans were confident they would go back into positive territory in terms of GDP growth but they would still be stuck in recession if it had not been for Germany. Both American and European central bankers are now facing a dilemma. They can admit that quantitative easing was designed to buy time and that politicians have been wasting it by not reducing taxation, cutting spending and engaging in extensive deregulation or they can sit back and pretend they will grapple with future monetary havoc when it shows up.

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