Professor de Grauwe on ECB policies

Criticism of the European Central Bank by Nicolas Sarkozy is “ill founded” argues Professor Paul de Grauwe. In this interview, he speaks about the ECB’s policies, eurozone enlargement and why central banks hide the “cost of cash”.

The European Central Bank has been sharply criticised by Nicolas Sarkozy during the French presidential election campaign. Do you think his criticism is well founded?

This criticism is ill founded, and dangerous. Ill founded because none of the problems France is facing can be tackled by the ECB or looser monetary policies. The attacks are based on French politicians having discovered the need to create an outside enemy on which they can load their own failures. It is also dangerous because if taken seriously, it would endanger the monetary union. Happily, there is little chance that these attacks will have any influence after the election. 

Four or five years ago, there was an apparent consensus among continental economists that the UK should join the euro and that it would suffer in any big swings; it didn’t happen and the UK economy does not appear to have suffered greatly as a result – where is the consensus today? What advice would you offer Gordon Brown’s successor concerning the euro and the eurozone? 

I have certainly never given the advice that the UK should enter the eurozone. I am a little agnostic about the subject. The UK is sufficiently idiosyncratic as to warrant staying out of the eurozone. It is also not very much integrated with the rest of the eurozone for it to expect large economic benefits from having the same currency. Finally, the UK in the eurozone will complicate policymaking in the zone even more.

Concerning the new member states in central and eastern Europe, do you think that the increasing heterogeneity of eurozone members may increase the problems of having a one-size-fits-all monetary policy?

The economic impact of the new member states on the eurozone will remain small in the near term. As a result, they policymaking by the governing council will not be very much affected, provided the governors of these countries do not take a nationalistic attitude when they recommend particular interest-rate policies. 

Should European banks be concerned about the collapse of the US sub-prime market? Are there risks of contagion? Are there any lessons for Europe in terms of the European house price inflation in recent years? 

The recent events should worry the ECB only if they propagate further and lead to a hard landing of the US economy. But even then, there is little that the ECB can do about it. The problem of house-price inflation in the eurozone is that it has not occurred across the board. The average house prices in the eurozone have not increased dramatically. They have in a number of individual countries. However, the ECB cannot concern itself too much with national developments. 

Why is the ‘cost of cash’ not included in the Commission’s impact-assessments calculations in the area of financial services? Do you think it should?

Yes. The cost of cash is a multiple of the cost of cards. It is, however, not transparent. And consumers are unaware of the high cost of cash. Central banks are aware of this but they have a vested interest in not being transparent about it.