Hawks and Doves #5

084dacfe-2e0c-42fc-96af-94b37518a67fBy Riccardo Russo.

While the European political system is still threatened by populism, more and more doubts emerge on the reliability of US Presidency. Meanwhile, today the ECB is going to review its monetary policy under an increasingly pressing scenario.

Prof.Masciandaro, do you think the current populist stances may affect the ECB policy?

As a premise, one must say that a party is defined as “populist” if it satisfies two conditions: first, it claims to be against the establishment; second, its members are likely to sponsor short-termed economic policies, undervaluing the corresponding medium-long run cost. An example can be the minimum wage hypothesis. What one would foresee for sure is their consequential increase in popularity. From a monetary policy standpoint, a populist party would most likely be against a prudent monetary stance – which is by definition long-termed – but also against the political independence of the central bank itself, that is the main cornerstone for an effective policy. Of course, the more power populist parties acquire in the EU, the more the ECB may be put at risk. We will see what the outcome of the forthcoming elections across Europe will be. At least for the moment, the ECB is unaffected.

Turning to our major ally, can we actually rely on Trumps claims against financial regulation and China?

So far Mr. Trump has assumed the so called flip flop strategy: given a topic, he constantly changes his view on the matter. Financial regulation is an example: as a candidate to the Presidency he harshly criticized Wall Street, blaming its institutions for the outbreak of the financial crisis. Now, as President, he has announced a partial repeal of the Dodd-Frank Act, passed under the Obama Administration to regulate the financial sector. Another example is the exchange rate policy. During the electoral campaign, he claimed that China manipulates its currency depreciating the Renminbi so to boost trade exports. Data not only show that in the last two years there has been no currency manipulation, but that – actually – there has been an opposite trend.

Are we going to have a shift in the ECB strategy following todays board meeting?

Draghi and his Governing Council will not change the EU monetary stance. It is interesting to note that in these weeks we are witnessing an encouraging progress in the European macroeconomic performance. On the top of that, non-economic risk also decreased following the first round of the French presidential elections. Nevertheless, this reassuring scenario may in actual facts complicate Draghi’s life: the paradox is that the better the conditions get, the harsher will be the debate inside and outside the ECB Council. Doves and hawks will start fighting, the former preferring to still have an expansionary monetary policy, the latter convinced that it would be time to get back to a “normal” strategy, characterized by positive interest rates. Anyway, no matter what they claim, to have a change in the policy implemented we need at least these three conditions: a first and temporal one is that inflation must be stable, just a single figure on inflation approaching 2%, as we saw in the last two months is not sufficient. The second is technical: monetary stability must be self-sustainable, i.e. we need a 2% figure in the absence of an aggressive expansionary monetary policy, which is currently underway. The last is geographical: the 2% inflation must refer to the whole Euro-area, not just a single country, for example Germany.


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