by We’re publishing some expert ideas about the future of the ECB (and hence Euro money). Two days ago some ideas of Willem Buiter were published, yesterday we published some ideas from Richard Werner. Today some ideas by Thomas Mayer. Beware the last sentence. EMU is incomplete and dysfunctional The European Monetary Union (EMU) is incomplete and dysfunctional. First, it is incomplete, because the quality of book money created by banks through credit extension differs from country to country (depending on the quality of the banks’ credit portfolios and the financial capacity of the governments to support weak banks in their jurisdiction). We have a paper currency union (as euro notes are the same in all member countries), but no monetary union (as deposits differ). Second, EMU is
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We’re publishing some expert ideas about the future of the ECB (and hence Euro money). Two days ago some ideas of Willem Buiter were published, yesterday we published some ideas from Richard Werner. Today some ideas by Thomas Mayer. Beware the last sentence.
EMU is incomplete and dysfunctional The European Monetary Union (EMU) is incomplete and dysfunctional. First, it is incomplete, because the quality of book money created by banks through credit extension differs from country to country (depending on the quality of the banks’ credit portfolios and the financial capacity of the governments to support weak banks in their jurisdiction). We have a paper currency union (as euro notes are the same in all member countries), but no monetary union (as deposits differ). Second, EMU is dysfunctional, because the monetary policy of inflation targeting pursued by the ECB has broken down. Since the Phillips curve no longer works, the central banks has lost control over inflation. The ECB-“Insiders” (policy makers and their loyal “watchers”) of course deny that the emperor has no clothes and hope that the Philipps curve would come back at some point. This amounts to a denial of reality. Against this background, I propose first to complete EMU by introducing a safe bank deposit, i.e., a deposit fully backed by reserve money deposits at the central bank. The safe deposit would turn deposits (like bank notes) into complete substitutes across countries (anyone wanting to read more on this can find it here. Second, I propose that the ECB abandon the policy of inflation targeting and adopt a rule for the expansion of reserve money (which would of course translate into the expansion of the safe deposit). The rate of expansion should reflect the expected nominal growth rate of the economy. This rate could only be altered with a two thirds majority in the Governing Council on the basis of an assessment of any structural changes that are expected to change the long-term growth rate of the economy. I am aware that there would be no room for pro-active monetary policy in this regime. In my view, this is its biggest advantage.
Mit freundlichen Grüßen Dr. Thomas Mayer.