ECB’s old guard attack Draghi’s long-term easy money policy

Six bankers speak out as Christine Lagarde prepares to take over as president

Six former euro zone central bankers on Friday criticized the European Central Bank’s ultra-easy monetary policy under the presidency of Mario Draghi, saying it has been unsuccessful and probably aimed at bankrolling indebted governments.

In a two-page document, former ECB board members Juergen Stark and Ottmar Issing, along with former rate setters from Germany, France, Austria and the Netherlands, also argued that the ECB’s aggressive stimulus was unjustified, inflated property prices and could sow the seeds of the next crisis. Their attack came at a time of discord inside the ECB, where more than a third of policymakers opposed more money printing last month, and reflected the radical overhaul of the once conservative institution’s policies under Draghi. The memorandum was released to journalists less than a month before Draghi makes way for the new ECB president Christine Lagarde.

The Frenchwoman told her confirmation hearing at the European Parliament that an easy monetary policy stance was needed but also had side effects. Analysts expect her largely to follow Draghi’s line, which she supported during her time as managing director of the International Monetary Fund.

“As former central bankers and as European citizens, we are witnessing the ECB’s ongoing crisis mode with growing concern,” wrote the six signatories, most of whom are in their 70s and 80s. Stark, a German, stepped down as the ECB’s chief economist in 2011 in conflict with the bank’s policy of buying government bonds to combat the euro zone’s debt crisis. Modelled on Germany’s own Bundesbank and preoccupied with containing inflation, the ECB was slower than its peers in Britain and the US in resorting to massive bond purchases in response to the financial crisis of 2008.

It was not until Mario Draghi took office in 2011 that the ECB ditched German orthodoxy by gradually pushing rates below zero and eventually buying some €2.6 trillion of euro zone bonds, mostly issued by governments.

The ECB has credited these extreme measures with staving off the economic threat of deflation, or a sustained fall in prices.

But these policies have fueled resentment in Germany and other cash-rich countries, which fear that savers are being penalized and may one day foot the bill for profligate governments elsewhere.

“The suspicion that behind this measure lies an intent to protect heavily indebted governments from a rise in interest rates is becoming increasingly well founded,” the memorandum said.

It was also signed by former governors of the central banks of Austria (Klaus Liebscher), the Netherlands (Nout Wellink) and Germany (Helmut Schlesinger), as well as an ex-deputy governor of the Banque de France, Hervé Hannoun.

Former French governor Jacques de Larosière was not a signatory but was cited as sharing its judgments.