To tackle inflation, the ECB should turn off the printing press

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ECB President Christine Lagarde (Copyright: "New ECB Chief Lagarde to address plenary for first time" by European Parliament is licensed under CC BY 2.0)

By Eelco Heinen, a Dutch Member of Parliament for the governing “People’s Party for Freedom and Democracy” (VVD) 

Prices continue to increase and our purchasing power is under enormous pressure. Still, the causes of inflation are hardly discussed, notes Dutch MP Eelco Heinen. This problem needs to be tackled at the source. The role of the European Central Bank is crucial here. It should end its money printing.

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Energy prices have been increasing for some time now and global shortages caused by the Covid crisis have pushed prices up further. The European Central Bank (ECB) is however also a major contributor to inflation, and the only one which can prevent it from getting further out of control. Put simply, the more money which is being printed, the more prices will rise.

The ECB’s money printing presses have been running at full capacity for more than a decade now. Since the last economic crisis, the ECB has kept interest rates at a very low level, while also buying up thousands of billions of euros worth of debt and injecting money into the economy.

Out of control

Even if this could initially be justified in order to prevent a new crisis, the ECB has gone too far with its policies. In recent years, we have already seen the negative consequences: extremely high housing prices, financial bubbles on stock markets and erosion of pensions.

Meanwhile, inflation has become much more noticeable in our economy. Groceries, petrol, building materials – everything is becoming more expensive. For the first time since 1975, inflation in the Netherlands is now higher than 10 percent. This is an unprecedented and potentially disruptive situation that needs to be addressed quickly.

Highly indebted countries

Central banks around the world are therefore intervening quickly by turning off the printing presses and raising interest rates. Why is the ECB not doing the same? It fears that highly indebted countries like Italy will immediately get into trouble if interest rates increase too much.

Because the ECB has been buying up all kinds of debt in Europe for years, these highly indebted countries have simply been able to postpone necessary reforms, something which enables debt to increase even more. Without the ECB’s purchasing programmes, the debt of these countries would soon become unsustainable.

So what is the ECB’s solution? More debt purchasing! This time targeted at the debt of the problem countries themselves, Italy in particular. This is a panic reaction whereby the ECB is going way beyond its mandate. It violates the ban on ECB monetary financing of governments, which is laid down in the EU Treaty.

Moreover, this does not solve the structural problems, because as a result, the problem countries will not reform, which means that debts will increase further and that the ECB will eventually need to intervene again. In this way, the ECB continues to chase its own tail.

The ECB should stop these monetary schemes and it should quickly start fighting inflation. It is then up to national governments to tackle the economic problems in those euro countries. For instance, by tightening budgetary rules.

 

The wrong solution

Some countries, France in particular, are now arguing for a relaxation of those budget rules. This is really the wrong solution. It is like countering floods by further opening the sluices.

The Netherlands will need to make clear that a relaxation of fiscal rules for problem countries will not be possible without structural reforms. Not more, but less debt is needed.

If we want to tackle inflation at its source, the importance of budgetary discipline throughout Europe must be reaffirmed. Starting with stopping the ECB’s money printing presses.

Originally published in Dutch by De Telegraaf

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