The European Central Bank must not base its decisions on the political situation in eurozone countries

FD, NPO Radio 1
Erasmus School of Economics

The European Central Bank (ECB) has introduced plans to buy up the debt of individual eurozone countries, including Italy, in order to reduce interest rate differentials within the eurozone. Casper de Vries, Professor of Monetary Economics at Erasmus School of Economics, shows his concerns about the ECB’s approach in FD. In addition, Ivo Arnold, Professor of Monetary Economics at Erasmus School of Economics, explains why bringing down inflation should be the main goal of the ECB.

Other instruments

Professor De Vries argues that there are already other instruments to help individual member states. Such as the European Stability Mechanism, with which countries can receive credit under the condition that they will implement economic reforms. The ECB, however, justifies her approach by explaining that diverging interest rates in the eurozone makes it difficult to fight inflation in a unified way.

ECB should remain independent

De Vries agrees that the proposed plans might be beneficial for efficiency purposes. However, he is worried that the main driver of this plan is not efficiency concerns, but the political situation in Italy. While the ECB, as an independent institute, must not base its decisions on the political situation of eurozone countries. According to Professor Arnold, the ECB's priority must be to bring inflation down: interest rates are still very low, which means there is not yet an acute debt crisis for Italy. In the short term, Italians can afford higher interest rates. The ECB has not raised interest rates since the credit crisis: we are already at a low point and the increase is very modest. In recent years, the ECB has always pursued a crisis policy and kept interest rates low. To curb inflation, the ECB has also started to phase out its buy-back programmes. As a result, the amount of money in circulation is decreasing.

Casper de Vries, Professor of Monetary Economics
More information

For the full item from FD, 21 July 2022, click here (in Dutch).

You can listen to the broadcast of NPO Radio 1, 20 July 2022, here (from 20 minutes and 15 seconds onwards).

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