A monetary policy which is good news for everybody does not exist

Frankfurt – Ardo Hansson, 58, has an explanation for why central bankers are often criticised publicly. “We have to communicate paradoxical messages”, says the Governor of the Estonian central bank, who also sits on the Governing Council of the European Central Bank (ECB). He is referring to the ECB’s plan to raise inflation.

Ardo Hansson

 “The common sense attitude is to ask ‘why do we need more inflation? That doesn’t seem to make sense’. This makes it hard to explain”, says Mr Hansson, and he gives the example of Estonia, his homeland, where wages are increasing by an average of seven per cent per year, which is much faster than GDP. “Of course everyone wants higher wages, and they don’t see why that should create a problem. The central banker is the one trying to take away the punch bowl just as the party gets going”.

Mr Hansson was born in Chicago. His parents had fled to the USA during the Second World War, and he graduated from Harvard in economics. After Estonia became independent in 1991 he joined in the work to rebuild the country for some years. He was behind the pegging of the Estonian kroon to the German mark, which was the cornerstone of Estonia’s later accession to the monetary union. He has headed the central bank since 2012.

He has never liked the ECB’s decision to buy sovereign bonds in order to raise inflation in the euro area. In December 2016 the Governing Council of the ECB decided to extend the assets purchase programme out to the end of 2017. This was sharply criticised in Germany as inflation has finally started to show clear signs of rising, hitting 1.9 per cent in Germany and 1.8 per cent in the euro area as a whole. The ECB is aiming to achieve inflation of close to two per cent in the medium term. Given the current data, it may not come as a surprise that some are calling for the ECB to tighten its loose monetary policy at once.

Although Mr Hansson is no fan of expansionary monetary policies, he disagrees with the critics. “We made the decision to extend the programme in December 2016. That is not so long ago”. He argues that central bankers have to be consistent in their monetary policy unless something unexpectedly dramatic occurs. It is not possible to do a somersault in policy and end the purchase programme unexpectedly. “The rise in inflation is good news for the central bank, but it is important to look at it closely”, Mr Hansson explained further to Süddeutsche Zeitung. There is no real confirmation that inflation has been resuscitated. “We need to have a few more months with positive surprises, then we may need a policy correction”.

The decision of the ECB to expand the asset purchase programme by 540 billion euros to 2.3 trillion euros is also related in part to the upcoming elections in the Netherlands, France and Germany. “In this troubled political climate a central bank should be a source of stability, not of turbulence. This has little to do with tight or loose monetary policy. But there are good reasons for standing more firmly now than at other times, and for avoiding any drastic measures”.

Mr Hansson is a calm man who is careful in what he says and weighs his words well. He understands that some people are critical of the ECB’s policy. “You can’t have a monetary policy that everyone likes. There are always winners and losers”. He sees the risks in the flows of easy money coming from the current ECB policy. “The question is there of whether our policy discourages economic reform, and there is the risk that cheap money will lead to so-called zombie firms emerging”. Zombie firms are those that survive only because interest rates are at around zero per cent and not because they have a viable business model. “But in the end central bankers cannot be held responsible for everything. Our responsibility is for the price stability of the euro”.

Before taking the position as Governor of the central bank, Mr Hansson worked at the World Bank, at first as an economist covering the rebuilding in eastern and southern Europe, and then as Chief Economist of the World Bank in China.

The criticisms of many ECB policies leave Mr Hansson unmoved. “It only becomes dangerous when politicians seek to influence our decision-making”. But that has not happened so far. As central bankers comment on the fiscal policies of governments, so politicians are entitled to give their opinions. “It would be very strange if nobody ever commented on our monetary policy”.

Markus Zydra

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Süddeutsche Zeitung