The chief central bankers of Germany and the Netherlands criticized the European Central Bank’s “quantitative easing” policy this week, expressing both countries’ concern that “easy money” will discourage less competitive euro states from enacting liberal economic reforms.
The Financial Times reports that Jens Weidmann, head of the Bundesbank, cautioned that cheap government financing could convince politicians in France and Italy that further reforms are unnecessary.
If the member states get used to such financing conditions, it could lead to a lessening of their motivation for further consolidation or reform measures.
Weidmann’s warning came only days after European Central Bank chief Mario Draghi launched a €1.1 trillion bond-buying scheme designed to boost growth and stave off the prospect of deflation.
Inflation has been below the Frankfurt bank’s 2 percent target since the European sovereign debt crisis began in 2008.
Klaas Knot, president of De Nederlandsche Bank, was even more explicit, warning that “there will be no market discipline or very little market discipline” on governments that continue to spend more than they raise in revenue.
This means that budgetary rules have become even more important to safeguard discipline in government budgeting.
Yet earlier this month, the European Commission gave Belgium, France and Italy reprieve from the bloc’s budget rules, allowing them to post deficits in excess of the 3 percent treaty limit — provided they do reforms.
Knot noted that France, the eurozone’s second largest economy after Germany, had broken the budget rules for eleven of the past sixteen years. “For each individual year, you can come up with an explanation about an extraordinary recession or circumstances,” he said. But if exceptions are made almost every year, it “undermines support for the European project.”
France did introduce liberalizations last month that allow businesses to operate on more Sundays, shorten labor arbitration procedures and open up protected professions such as pharmacists and notaries. However, corporate taxes and the cost of doing business remain higher in France than in northern countries.
Italy’s prime minister, Matteo Renzi, is also pursuing labor reforms that should make it easier for firms to hire and fire workers. But many professions, such as lawyers, notaries, pharmacists and taxi drivers, are still notoriously difficult for newcomers to enter.
Italy is also among few countries where labor costs continued to rise during the European sovereign debt crisis and where it costs more than the average annual income to start a company.
Dutch and German media were critical when Draghi first announced the quantitative easing program in January.
De Telegraaf, the Netherlands’ biggest newspaper, praised Knot at the time for joining his counterparts from Austria, Germany and Estonia in voting against the program.
Germany’s conservative Die Welt newspaper warned that Germans were losing confidence in the central bank. Handelsblatt likened Draghi’s stimulus to a “drug” and the tabloid Bild asked, “Is the ECB banker destroying our money?”
Unlike Draghi, the Germans — still haunted by the experience of hyperinflation in the 1920s — do not see falling prices as a problem. Weidmann argued it was only a “temporary” phenomenon. It would have been better to see it out the fall in oil prices, he said.