ECB chief economist warns of political interference

Outgoing European Central Bank chief economist Jürgen Stark has admitted the political pressure on the bank is “enormous”, and recommended his successor to use “all means available” to defend the bank’s independence.

In an interview with the Frankfurter Allgemeine Zeitung on Saturday Stark said “the euro is a stable currency”, and will have more members using it in 10 years.

“I remain tied to the project of a shared European currency,” he said.

Stark filled the ECB position for five years, and said the political pressure on the Frankfurt-based bank is “enormous at the moment [and] there is much talk publicly about the extension of our duties. That not only touches upon our independence – it endangers it.”

Stark counselled Jörg Asmussen, who will take over Stark’s role, to “defend the independence of the ECB with all possible means”.

He also said the ECB’s bond buying program should not be widened, despite a series of private sector figures urging this over the past week.

“It is not so much that buying of bonds at the moment would lead to inflation. It is more important and problematic that the rates for sovereign debt is influenced by the buying of bonds and, through that, it has a fiscal political effect.

“We influence the conditions by which governments can take on debt. That is absolutely not our task. There must be a clear division of duties between a central bank and governments. The central bank has to look after price stability and it is the responsibility of governments to take care of measured conditions for financing its sovereign tasks.

“If markets have become more sensitive for a time to the high level of debts of states, and for that reason demand higher rates, it is not the task of the central bank to correct that.”

Stark said that it “always led to catastrophe” when central banks financed states to a great degree.

“It ends in inflation – not always in the short term but mid- to long-term. And in the end it leads to economic and social instability.”

Stark said the world was experiencing “an extremely expansive monetary policy”, and although that has not yet led to inflation because banks have only added liquidity in a measured way during the crisis, “that will change when the economy one day runs better again”.

Stark said people should not react too dramatically to the shortfall of sales of 10-year Bunds last week, and should remember the offered rate, of around 2%, still lay below inflation. “No wonder then that the investors hesitate.”

FAZ asked him how Europe should choose between ‘the plague and cholera’ – Eurobonds with shared liability of all countries, or turning on the printing presses.

“The printing presses…will not be used in any case for the reduction of sovereign debt. We fulfil our contractual duty by ensuring price stability in future. When a central bank starts to finance states, then the urgency for states to tackle the causes of the crisis sinks.”

He said the halt of increasing public indebtedness must go hand in hand with structural reform to improve the competitiveness of the ‘problem countries’ and improve thjeir growth prospects.

“That is a matter for governments, not the central bank.”

He said the euro will still exist in 10 years, “but possibly with more member states. But we must learn lessons and scrutinise more intensively and critically the fulfilment of convergence criteria of potential [eurozone] entry candidates”.

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