A group of leading economic advisers in Germany has warned that the European Central Bank (ECB) should end its economic-stimulus measures — better known as quantitative easing (QE) — to “prevent a new financial crisis from erupting” in the euro-zone.
The Council of Economic Experts — known as “Berlin’s wise men” — said that the ECB must consider “tapering its bond-buying measures early” to prevent dangerous imbalances building up in the economic bloc.
The latest annual report from the Council said: “Monetary policy is leading to a build-up of risks to financial stability that could pave the way for a new financial crisis. Persistently low interest rates erode the earnings of banks and life-insurance companies and raise the appetite for taking risks.
“It is important to avoid delaying an exit from the low interest-rate environment for too long. Instead, the ECB should announce a timely end to monetary-policy accommodation that could effectively prevent the further build-up of risks in the financial system.”
The warning comes as EU policy makers are expected to cut interest rates and expand their 1.1 trillion euro stimulus measures in December. Eight months on from the start of its QE programme, the EU “remains plagued by weak growth and low inflation, as falling commodity prices have exerted downward pressure on consumer prices,” according to the team of German economists.
“Overly expansionary monetary policy is also encouraging governments to put off the vital economic reforms needed to spur growth and productivity in the long-term. Further structural reforms to strengthen markets and competitiveness are crucial for a self-sustaining economic recovery.”
They went on to highlight Ireland, Spain and Portugal as former ‘bail-out’ countries that have taken painful decisions to re-new their economies and returned to sustainable economic growth.
They also said: “Without an imminent rise in interest rates, a rapid increase may be necessary at a later date. After a prolonged period of low interest, this could jeopardise the solvency of large parts of the banking system, cause asset prices to plummet and threaten the already weakened life-insurance sector.”
The ‘wise men’ went on to say that EU member states should be able to exit monetary union “as a last resort”.
Although they did not advocate a formal exit procedure to be put on the statute books, they said that “recent events in Greece have shown that one member country’s fundamental unwillingness to co-operate could create an existential threat to the stability of the monetary union”.