Two of the world’s most senior central bankers have hit back at charges that they have become too politicised, saying their calls for governments to take more aggressive steps to steer their economies towards a full recovery were necessary.
Mario Draghi, the president of the European Central Bank, and Stanley Fischer, the US Federal Reserve’s vice-chair, also disputed the idea that unelected technocrats should refrain from commenting on governments’ economic policies.
The remarks, at the ECB’s annual conference in Sintra, came after Mr Draghi on Friday called on lawmakers in the eurozone to implement politically unpopular structural reforms, or face years of weak economic growth.
The ECB president on Saturday said his calls were appropriate in a monetary union where growth prospects had been badly damaged by governments’ resistance to economic reforms.
Mr Draghi said it was the central bank’s responsibility to comment if governments’ inaction on structural reforms was creating divergence in growth and unemployment within the eurozone, which undermined the existence of the currency area.
“In a monetary union you can’t afford to have large and increasing structural divergences,” the ECB president said. “They tend to become explosive.”
Mr Draghi’s defence of the central bank came after Paul De Grauwe, an academic at the London School of Economics, challenged his calls for structural reforms earlier in the week. Mr De Grauwe said central banks’ push for governments to take steps that removed people’s job protection would expose monetary policy makers to criticism over their independence to set interest rates.
The ECB president said central banks had a long tradition of commenting on governments’ economic policies, and that they had been right to speak out against wage indexation in the 1970s and fiscal excesses in earlier decades.
He said central banks had been wrong to keep quiet on the deregulation of the financial sector. “We all wish central bankers had spoken out more when regulation was dismantled before the crisis,” Mr Draghi said. A lack of structural reform was having much more of an impact on poor European growth than in the US, he added.
Mr Fischer said central bankers should think about structural reforms “in the context of what’s the expected growth rate in the economy”.
The Fed vice-chair said it was appropriate for monetary policy makers to comment on spending in infrastructure and education because of the impact it had on US growth. “There is general agreement that US infrastructure could do with a lot of investment. You just have to go on trains in the US or Europe to figure that out,” Mr Fischer told the audience of top academics and policy makers in Sintra on Saturday.
He acknowledged there were limits on what was appropriate, saying he would “never talk about whether the defence budget was appropriate”.
The passing of the Dodd-Frank Act was a “very massive change in the structure of the financial sector” and was “very important for financial stability going ahead”.
Haruhiko Kuroda, the governor of the Bank of Japan who joined Mr Draghi and Mr Fischer on the panel, said he expected inflation to reach 2 per cent around the first half of the 2016 fiscal year.