The ECB’s price policy has achieved to be on target in the medium term with inflation low, but close to, 2%. Only temporary fluctuations of inflation were higher than 2% or be-low 0% (Figure 3) and occurred momentarily during crises or shocks, and were generally avoided. But the definition of medium-term still has to be specified: e.g. four to five years.
The interpretation of the ECB’s legal mandate to foster EMU and EU wide economic growth
Page | 165
could have received an earlier and higher level of emphasis and prioritization - in the ECBs scope. The general MP’s assessed were often found to be relatively appropriate given its legal scope. And that is exactly the problem: the ECB doesn’t have the scope to solve the dilemmas and MP problems - only a MS change could. However, some empirically founded points of critique can generally be established (see Table 9). In summary, the EU Great Moderation, independence, Bundesbank-like MP ‘inflation targeting’ and Maastricht crite-ria have stabilized prices, and today the ECB assumes its role for growth more than before.
5.1.2Empirically Founded Critique of the ECB’s Monetary Policy Table 9 Evaluation of the ECB’s MP: empirically founded critique
(1) Crisis Management (CM) of the ECB’s MPs during shocks and crises:
(1.1) A delay of CM in the FC: a too high MRO rate (Figure 35), early contractive MP (1.2) A delay of CM in the EC: a lack of bond stability (Figure 40); a fiscal-monetary
framework could have prevented many secondary, and panic-driven, costs of the EC, the Councils technical decisions on the EFSF/ESM and the OMTs (Castells et al. 2014) of 8-2012 could have been more preventive, as well as cost-effective and just-in-time (e.g. GPIIS): MP was effective but not efficient.
(1.3) Permeating liquidity and cumulative CFs were too low for job creation or GDP growth, especially during the FC and EC (e.g. Greece, 4.1.1.1) indicating ECB-involvement, overall debt level is too high, non-absorbed penetrance of three crises on the job market (2002, 2008, 2012, Figure 51) and output (Figure 13).
(2) Economic growth policy of the ECB:
(2.1) Lack of a transparent systematic orderly open market purchase program: EMU wide Euro bonds or G-bond purchases program with automatic stability mechanism.
(2.2) No solution developed for all MTC inefficiencies, first detected here (see 4.3.8).
(2.3) Less supply of ‘transactional money’ circulating in the real economy (see 4.1.2).
(2.4) Lack of effective monetary incentives driving investment (see Figure 63).
(2.5) Sub-optimal fine-tuning of velocities for output (Figure 13, Figure 51).
(2.6) Sub-optimal Keynesian anti-cyclic stabilization MP.
(2.7) Lending Benchmark Calculations (e.g. for TLTROs, etc.) are the first step in the right direction but do not go far enough: Lending margins and deleveraging must be a pre-requisite for all MP operations. All ECB lending and allowances must be better coupled to MTC function. All MFI cash and lending margins must be ECB specified.
Page | 166 (3) Efficiency and Effectiveness of the ECB’s MP:
(3.1) The effectiveness of the ECB’s MP can still be achieved, in full agreement with the ECB president Mario Draghi (Black & Speciale 2015), but at very high costs and low efficiency, owing to the MS: i.e. most of the new money doesn’t benefit MTCs.
Effectiveness if only achievable at low efficiency represents a high risk for the EMU.
(3.2) Efficiency is minimized by ‘MP dilemma’ causing excess reserves, high PTs, un-coupled leverage, illegitimate money multiplication with no allowance demarcation.
(3.3) Inefficiency prevails if MFIs may hoard, recycle and privatize liquidity/money.
(3.4) Inefficiency from accommodative MP during expansion (Lee & Crowley 2010).
(4) ECB’s Integration Policy for Heterogeneities in the Eurozone:
(4.1) A better weighting that fully includes all country risks and benefits is needed: a single MP has to form a better compromise for the differing demands and condi-tions of the economies of all members. The ECB/EU has not developed customized MP tools, which are required as countries face differing challenges. The degree of austerity imposed on debtor countries (Greece 4.1.1.1, etc.) controverts an inevita-bly needed Keynesian stimulus (see 4.3.8.6) and monolithic normative fiscal-MP package; the reversed MRO rate and PT in 2011 were disadvantageous (4.3.1, 4.3.2).
(4.2) EMU financial sector heterogeneity and lack of competition still persist (4.3.2 and (Lee & Crowley 2010; Blot 2013; Peersman 2004)); also: financial heterogeneity.
(5) The ECB’s Performance in Monetary Transmission (see 4.3):
MTCs are effective not efficient and several lack down-stream responsiveness: For example, loss of transmission in MTC3,4 occurs post-stock market price increases - which is not the ‘ECB’s fault’ but an empirical factor that lowers MTC performance.
By far too much new money is needed to stimulate new investment and GDP.
(6) Ability to plan and control the money supply: M0: high, M1: medium M2-4: low (4.1.1) (7) Target accuracy: inflation: medium-high, output: low, employment rate: low
(8) Decomposition of transmission on output and prices: low-medium
(9) Liquidity supply for real economy: (4.1.1), ECB 15.2% vs. Fed: 22.7% of GDP (M0) (10)Wrong use of the Taylor model in 2007-2009, which might have worsened the FC.
2008: the Taylor model recommended lowering the MRO rate but it was increased;
it implies a bigger gap in output in 2009. During crisis, ZNLB, or steadily increasing market interest rates the Taylor model is partially disproved here: as the dependen-cy of market rates on key rates is ‘not counterbalanced’ (6 Fig. S16): if market rates
Page | 167
stepwise grow with a MRO a feedback drops GDP and investment (e.g. pre-FC).
Evaluation of MP via models (DSGE-VAR, Taylor, etc.) is hampered by a lack of integ-rity (2.4.2), data, parameters, or output gap estimates (Orphanides & Norden 2002).
(11)Democratic mandate: independence historically profited price stability due to less idiosyncratic MP, but lacks a democratic mandate for always effective economic MP.
(12)Social Disparity Dilemma: Less liquidity is more efficient but less effective. Tight money provides less leeway for MFI to deprive money (ca. >€250bn p.a.), but effi-cient MP harms the economy by causing high real interest rates. New money mainly profits MFIs and the wealthy, not the economy/customers, due to MTC inefficiency.
MP diminishes the relative return for high savings volumes of the general public.
Most of all MTCs assayed reveal a ‘better’ monetary fit to economic condition from 2002-2007. This time was characterized by low interest rate expectations (see 4.3.1, Figure 34), a heightened global usage and demand of Euro also as international currency vehicle (BIS 2013), and inter-crisis economic growth and investment. Aligning the liquidity preference, money balances (Figure 21), and the BoP (see Figure 58) reveals a generally suitable ex-change rate policy but the EC has unnecessarily damaged the Euros reputation and demand as vehicle: faster, concerted policy actions would have prevented a big loss.In spite of eve-rything listed in Table 9, although with delay, the ECB’s CM helped stabilize prices, con-sumption and GDP to some extent. But it lacks a mandate to shrink the debt EU debt over-load. Today’s MP limitations fully hinder the ECB to solve most of the very important MTC
‘inefficiency issues’. Through this, the ECB is ‘condemned to be effective’ although at the
‘second highest costs’ for the economy (the highest cost would be ineffectiveness). Money is at the very core of all nations. It still escapes democratic control. Typified, the FC+EC are only forerunner tips of ‘fractional’ ice bergs to market economies.
5.2 Evaluations of the MS: Towards a Digital Full-Reserve System