On the 21st of October, President Christine Lagarde and Chief Economist Philip R. Lane hosted the first ECB Listens event aiming to gather the views of a variety of civil society organizations on its policies and how to tackle key challenges ahead.
COFACE Families Europe took part in the meeting and shared some of its views and reflections on monetary policy. While COFACE-Families Europe’s main remit in economics and finance is financial inclusion, making sure all families have access to affordable, accessible and quality financial services, the invariable response from policy makers to COFACE-Families Europe’s recommendations, “Who will pay? There is no money!”, prompted COFACE-Families Europe to dive more deeply into macro-economics and monetary policy, understanding how the global financial system works, and also taking an interest in the role of the ECB.
Our recommendations and reflections can be broken down into two categories:
- Plan A which are recommendations to solve problems within the current system,
- Plan B which are reflections examining alternatives to a debt based monetary system.
The “Plan A” type recommendations lead us to consider the works of Kate Raworth and her Doughnut Economic model for instance, and many other recommendations in line with Finance Watch and other civil society organizations COFACE-Families Europe cooperates with. However, COFACE-Families Europe also recognizes the major shortcomings of a debt based monetary system which require an “out of the box” thinking, examining closely how the financial system works, what is money, and look at alternative models to a debt based monetary system. (See COFACE Families Europe’s training on “What is Money?” below)
COFACE Families Europe’s comments on the role of the ECB
With regards to the communication strategy of the ECB, COFACE-Families Europe wishes to underline that any communication about the state of our economy in a debt based monetary system is difficult given the effects it can generate. Announcing “bad” news can trigger a response by people which only makes the situation worse. The ECB should carefully assess how to communicate with citizens and organizations representing civil society in a way which is constructive and clear, presenting the problems our economies are facing, what input it expects from citizens and civil society, and what policy options are on the table for discussion. It is important to have a structured dialogue in order to maximize impact and outcomes. Also, while public exchanges are very useful to set the general tone for the discussion, voicing key points and recommendations, having private and more in depth exchanges is an absolute necessity to allow going into more detailed recommendations.
With regards to the ECB’s role, even if this consultation shows a willingness to engage in a bottom up dialogue, the policy tools at the ECB’s disposal are invariably top down, in the sense that any new monetary programme, be it Quantitative Easing (QE) or future ones, have to trickle down through a number of institutional layers before, hopefully, reaching the real economy and people. It is equivalent to trying to replenish the ocean by dumping water on top of Mount Everest: it is very likely that it will freeze on top of it, get stuck in a dam or diverted by various irrigation systems before it reaches the ocean, and by then, it might be too late. This echoes Christine Lagarde’s call on Member States, just a few days ago, to distribute the crisis help funds of €750 billion without delay. Unfortunately, measures like QE have served to inflate what many economists call the “everything bubble”, increasing the prices of assets and the stock market which benefit a minority of rich people and thus further increase inequalities.
Another shortcoming of the ECB’s strategy of injecting extra liquidity to encourage lending, is that it invariably takes on the form of debt which means that it is the small and medium sized enterprises and people that bear all the risk for jump starting a deflated economy, by having to take on new loans to generate fresh demand and be the trigger for restarting a growth cycle. In case of failure, all that it generates is increased indebtedness, which puts even more pressure on SMEs and families. And even in the event the borrowing is done by governments, it actually boils down to the same: that money will have to be repaid via taxation. Hopefully, we will avoid a situation where a digital version of the Euro is introduced to allow charging negative interest rates on citizens’ accounts more easily to force them to spend.
Moving beyond growth at all costs?
Christine Lagarde readily admitted the current system’s dependence on growth during the event: “I know some of you don’t always like growth, but we don’t know at the moment of a system that is going to pull us out of the current situation”. Indeed, a debt based monetary system requires growth, otherwise interest on existing debt cannot be repaid.
Due to the issues identified above, COFACE Families Europe has also taken an interest in “Plan B” type recommendations and reflections, including exploring the potential of Universal Basic Income, the Relative Theory of Money by French Economist Stephane Laborde and others.
It would be essential to rapidly explore the feasibility of setting up a monetary system which is bottom up, truly democratic, where citizens are at the heart of monetary creation, which is resilient to shocks, can tolerate fluctuating demand, is not dependent on growth and nevertheless fulfills the essential mandate of the ECB of price stability.
What are the odds of revising the ECB’s role? How much flexibility is there to switch to another system which is not growth dependent? Both Christine Lagarde and Philip Lane underlined the constraints on the ECB’s action due to treaties, limiting its primary mandate of price stability, which are hard to amend and the necessity to be realistic about what can be achieved in this ECB Strategic Review. But this does not fully reflect the reality. It is only true now, because the economic and financial indicators the ECB is looking at gives them confidence that the economic situation is under control. But history has shown us just how creative the ECB and various governments can get when during the height of the 2008 financial crisis, emergency measures were taken without much consideration for treaties or legal constraints. In fact, most governments are now in violation of the Maastricht treaty in terms of the level of their public debt. Where are the treaty enforcers now? Desperate times call for desperate measures as the saying goes, so in essence, the ECB’s current position can be interpreted as such: “times are not desperate enough to consider certain ideas or policies”. This prompts the following question: what would it take for the ECB to change its discourse and be open to certain ideas and policies which are for the moment off the table?
It is difficult, of course, for the ECB to answer such a question openly, as it remains tied to its mandate, and only a real life situation would prompt the ECB to reconsider its position. Hopefully, however, the ECB’s Strategy Review will leave room for bolderchanges in its mandate and policies, as the challenges humanity is facing do require urgent action. Climate change and the deep crisis which will inevitably emerge from the current pandemic should not be taken lightly, and what is certain, is that a monetary system which relies on a nice and steady growth to roll over debt into infinity is unfit for achieving “price stability” or any stability for that matter, in the coming “Age of Disorder”, as Deutsche Bank has put it.*
COFACE-Families Europe will engage proactively in the ECBs Strategic Review in order to safeguard the general interest, help operationalize Christine Lagarde’s call for managing our currency as a common good, and thus ensure that the economy is at the service of society.
For more information about the event, please visit the official website of the event: https://www.ecb.europa.eu/pub/conferences/html/20200326_ecb_listens_event.en.html
Or contact Martin Schmalzried: email@example.com
* Side note: there is a certain irony in Deutsche Bank writing this paper, without mentioning the elephant in the room: the “disorder” that might also be caused by the collapse of bankrupt too big to fail financial institutions such as itself.