Donald Trump really is a bad bloke. Not only does he not fit into any familiar mould, the man has ideas that bring tears to the eyes of even seasoned conservatives. These days, the German business newspaper Handelsblatt reports with indignation that Trump is preparing to question one of the most important taboos of the neoliberals, the independence of the central bank. He actually wants to intervene in interest rate policy because he suspects that his instincts in these matters are better than those of the employees of the central bank.
The Handelsblatt immediately throws the strongest knock-down argument into the round by stating a breach of taboo and quoting an economist from Moody’s who says bluntly: ‘The independence of the central bank is the core of a well-functioning market economy.’ There we have it. The core of the market economy is not functioning markets, but the fact that the government has given a few technocrats the privilege of conducting ‘independent monetary policy’.
What makes such statements particularly absurd is that it is completely unclear what kind of independence is actually meant. After all, there are two fundamentally different types of independence: The American and the European. In the European case, the central bank is almost exclusively focussed on price stability, whereas in the American case it is at least equally responsible for a high level of employment. They are worlds apart.
Strangely enough, monetary policy in Europe is discussed as if there were no alternative to the European version of the institutional-political organisation of monetary policy with its pure focus on price stability. After all, all European countries have adopted the old German maxim that the central bank must not only be politically independent, but must also be almost exclusively committed to the goal of price stability.
Indeed, what Europeans would call a breach of taboo has long been the law in the USA. In the motherland of capitalism, the central bank has a truly demanding mandate: it is supposed to pursue monetary policy by influencing monetary and credit conditions in the economy with the aim of achieving full employment and stable prices. Full employment and stable prices – that is the Fed’s extremely ambitious mandate. In contrast, the ECB’s mission statement reads like child’s play: “The primary objective of the Eurosystem is to maintain price stability and thereby preserve the value of the euro.’
What exactly political independence means and how independent a central bank really is in day-to-day political business can be debated at length. However, it is hard to deny that the mission of a central bank – far beyond the question of formal independence – changes fundamentally if it no longer has to pursue price stability as its sole objective.
If it were even proposed in Europe, and particularly in Germany, to make the central bank equally responsible for employment and price stability, there would be an outcry of indignation from 95 per cent of economists and all conservative-liberal forces. They would loudly complain that this was a breach of taboo. This would be the end of the independence of the central bank, and it would also inevitably be the beginning of a wave of inflation, because the central bank is always in danger of buying more employment with a little more inflation.
Very clever monetarists would argue that such a mandate would theoretically present the central bank with a completely unsolvable task, because there is only a particularly close relationship between the money supply and inflation, but not between any monetary policy instrument and employment. Employers (and trade unions) would insist on the autonomy of collective bargaining, arguing that it is their job to ensure a high level of employment, as they are the ones who set the price on the labour market, which determines employment or unemployment.
What Donald Trump is calling for is therefore not a breach of taboo, but at most a nuance for the task of a central bank that is committed to general economic policy anyway, because the dogmatic neoclassical-neoliberal position of ‘neutral money’ has never been considered correct in the USA. The idea that the monetary sphere can be separated from the real sphere is simply untenable. Neither is price stability directly linked to monetary policy, nor is employment directly linked to wages. It is also indisputable that the USA is better than the European Monetary Union in all economic policy objectives, and equally good in terms of price stability.
Europe urgently needs to break the taboo
The extent to which Europe is harming itself with its dogma of a central bank focussed on a single goal is currently easy to understand. The latest inflation figures for August have just been published. According to these figures, consumer prices in Germany (harmonised) rose by 2 percent compared to the same month last year. In the EMU it was 2.2 per cent.
This should make it clear to the last sceptic that there can be no talk of inflation in the eurozone and that there was never any danger of truly dangerous inflation (as shown here in February 2022). In addition, there is no uniform inflation pattern: In Italy, for example, the inflation rate has been well below two per cent since the beginning of this year. This also proves to any reasonable person that there was and is no Europe-wide risk of inflation.
It is not even a question of whether the inflation rate is 2.4 per cent or 1.9 per cent. That is completely irrelevant. It is only about the fact that the short phase of strong price increases has come to an end and the question is whether or not this has led to inflation as a result of excessive wage increases. The answer to the latter is clearly no and that should be the end of the matter. But not at all. ECB Council members talk about the ‘greedy beast’ of inflation, which has not yet been defeated, and complain that the last mile in the fight against inflation is the hardest.
‘Bank economists’ representing the interests of their employers are warning and whispering in the media that it could go back up to 2.5 per cent and then we would not know whether the ECB could really cut interest rates any further. It is also noted that the price increase for ‘services’ is still high, which could also prevent the ECB from acting quickly, although here too it should be clear to everyone that these are of course the after-effects of the somewhat stronger wage increases, the effect of which will diminish massively in the course of this year.
A central bank with an equal commitment to employment would have to recognise that the number of unemployed people in Germany has risen by more than 100,000 since the beginning of this year and that the number of vacancies reported by companies has fallen by 100,000 in the same period. In the EMU as a whole (where the trend is also rising), the number of unemployed people remains at 11 million or 6.5 per cent. The USA has an unemployment rate that is very close to historic lows, while Europe remains well above them.
Instead of worrying about the small and minute decimal places behind the decimal point in the inflation rate, it should be clear from the central bank’s mandate that interest rate cuts are now urgently needed because the European economy is threatening to tip into the very recession that Germany has been in since at least the beginning of 2023.
Do technocrats not have to take any responsibility?
If technocrats are given great expertise, we should be able to expect them to take responsibility. Authority and liability, as neoliberalism teaches us, belong together. However, this principle is not followed when it comes to neoliberal dogmas. The German Bundesbank, for example, whose president was and is one of the biggest interest rate drivers in the eurozone, was fundamentally wrong with its inflation forecast. In December 2022, it predicted that the German inflation rate (harmonised) would average 7.2 per cent in 2023. The actual figure was 5.4 per cent. For this year, the Bundesbank even expected 4.1 per cent. However, the figure will be below 2.5 per cent (the ECB estimates 2.5 per cent).
Anyone who is so wrong has obviously not understood the fundamental relationships that were at stake back then, as they were in the 1970s (you can read about this, for example, in the Atlas for the World Economy 2022/2023, which was completed in September 2021). These institutions employ hundreds of economists at the top and on their staffs who play with equilibrium models that have nothing to do with reality. Obviously, no one has been able to understand a supply shock (as explained here) and draw the appropriate conclusions. They play glass bead games but are never held accountable for this glaring failure. Technocrats who have been declared independent with an overly simple task are also immune. This is clearly too much of a good thing.