_ Prof. Dr. Christian Seidl, professor emeritus of public finance, Christian-Albrechts-University. Kiel, September 16, 2022. Interview by Moritz Schwarz, Junge Freiheit.*
Putin and the pandemic are said to be to blame for the ruinous inflation in Germany and Europe. But the economist Christian Seidl warns: This claim hides the main part of the guilt of the ECB – which has been deceiving the citizens about its inflationary monetary policy for years.
Professor Seidl, “record interest rate”, “historic increase”, “interest rate hammer” – such attributes are coming one after another in the German media in view of the latest ECB interest rate hike. Right?
Christian Seidl: Compared to the long-term “natural” interest rate of around 3 percent, the current interest rate is still far too low.
So, the current interest rate hike of 0.75 to 1.25 percent is not enough to fight inflation?
Seidl: In 1980, when there was the question of efficiently combating inflation in the USA, the interest rate rose to 20 percent! The ECB seems to continue to be guided by its consideration for the Mediterranean countries.
A business magazine of the German public broadcasting recently explained the reasons for the inflation – the “three Ds” are to blame: deglobalization, demography and decarbonization. Is it that simple?
Seidl: That’s right, all three are driving factors: the disruption of supply chains due to the pandemic and war, the demographically caused labour shortage in Europe and the additional costs arising from the energy transition. However, it would be questionable if the broadcast gave the impression that the “three Ds” were everything and other important factors were not mentioned. However, that would fit with the currently popular method of hiding past mistakes behind current developments.
“War is peace and price stability is inflation”
Seidl: The monetary policy of the ECB. For years, the European Central Bank has spared no effort to brainwash the citizens: by claiming that price stability – the main objective of the ECB according to Article 127, paragraph 1, of the Treaty on the Functioning of the European Union (TFEU) – ought to be maintained at an inflation rate of 2 percent.
Why is this “brainwashing”?
Seidl: Because it is reminiscent of George Orwell’s “Newspeak” from his dystopian novel “1984”, for example: “War is Peace”, “Freedom is Slavery”, “Ignorance is Strength”. With such equations, “1984” tries to drum people into the idea that two mutually exclusive circumstances are one and the same. Similarly, the ECB is trying to merge “price stability” and “inflation of 2 percent” into an identical virtual concept.
Why are the two goals mutually exclusive? Isn’t some inflation the ‘natural’ consequence of growth, i.e., part of price stability?
Seidl: No, inflation is not an inevitable phenomenon. If money is not increased, its purchasing power does not decrease either – by the way, such a paradisiacal situation prevailed in the 19th century at the time of the gold currency. That you and many others now believe that inflation is part of price stability is the result of that same Orwellian vision.
“Two percent inflation harmless? Mistake!”
But what does all this have to do with current inflation? Unfortunately, the ECB’s long-standing “2 percent inflation” target has long been obsolete.
Seidl: Since the euro crisis in 2008, the ECB has been known to print money by hook or by crook – and that is a necessary condition for inflation! On the other hand, the objection is raised that inflation was at the desired 2 percent by 2020. That’s true, but that doesn’t mean that inflation was moderate until then.
Why not? 2 percent sounds moderate.
Seidl: First, 2 percent isn’t as harmless as most people think. Because that means halving the purchasing power of current savings in just around thirty years! For an inflation rate of ten percent, the purchasing power in thirty years would be reduced to some 4 percent! Second, the 2 percent is due to the fact that the ECB measures inflation as a consumer price index. What does that mean? Well, in normal times the production capacity of consumer goods exceeds the demand and so the consumer can get whatever he can afford – in other words, there are no shortages of goods.
While competition between producers prevents consumer goods prices from rising. The inflation measured in this way – i.e., via consumer goods prices – therefore remains modest. However, other rules apply to capital goods: real estate is scarce, apartments are scarce in the medium term, antiques and works of art are scarce, shares cannot be increased at will.
Because of the fixed supply, their prices will skyrocket as long as there is a sufficient supply of money and low interest rates. Between 2008 and 2020, real estate prices in medium-sized German cities rose by 107 percent! This corresponds to an annual price increase of 6.25 percent.
“Not eight, but eleven percent inflation!”
You mean the inflation rate was much higher than 2 percent if it weren’t for the omission of capital goods in the calculation?
Seidl: Yes, because if you assume that households spend around a quarter of their expenses on capital goods, the truth is that the realistic inflation rate would be 3.5 percent annually between 2008 and 2020, i.e. almost twice that!
Does this also apply to our current inflation?
Seidel: Of course.
So, don’t you think we currently have about 8 percent inflation (August 2022 – remark MIWI Institute)?
Seidl: In fact, more like 11 percent! If one also includes the expenditure for capital goods here, as one actually has to do.
So where is the massive increase in inflation coming from that is causing us so much trouble – also due to the ECB’s policy?
Seidl: The specific reason for this was that as a result of the corona pandemic and the lockdowns in several countries, especially China, supply chains collapsed, were blocked or suffered losses. This led to a global shortage of raw materials and intermediate products, which hampered production and caused industrial producer prices to rise sharply.
Commodities became scarce and rationed as prices rose, fuelling inflation since 2021. But the ECB’s only response was to keep printing money by hook or by crook – as if a skinny man could gain weight simply by making his clothes wider. And it’s been like this for a long time. Shortly before the Lehman bankruptcy in 2008, the ECB’s money supply was only 876 billion euros – by 2021, on the other hand, it had risen to around 6 trillion euros!
“ECB has usurped dominance”
The economist Hans-Werner Sinn put it this way: War and pandemic are the sparks that have now kindled the fire of inflation – but the tinder is the ECB’s monetary policy.
Seidl: That’s it! At the latest since the then ECB President Mario Draghi announced his famous dictum in 2012: “Whatever it takes!”, which usurped the democratically elected governments of the euro member countries. Because the treaties on which the euro is based – the TFEU – actually oblige to give priority to the fiscal policy decided by the parliaments over the monetary policy.
But despite having no democratic legitimacy like parliaments, the ECB has undermined this principle with a fait accompli and instead imposed the primacy of monetary policy over fiscal policy! And that with the kind support of politicians – who in truth are of course happy that they don’t have to break the laws of the TFEU, but that they can shunt it off to an authoritarian institution such as the ECB. In contrast to democratically elected institutions, the ECB is not accountable to anyone, and its president enjoys extensive immunity.
The fact that the Mediterranean countries have a majority in the bank’s governing council – in which, due to a design flaw, each country has exactly one vote, i.e. Malta as well as Germany – explains their dominance in monetary policy. However, due to a lack of economic knowledge, the general population does not see through the danger involved.
How big is the share that ECB policy has in inflation – can you calculate that?
Seidl: No, that’s too complex because it depends on too many influencing factors. But we can compare ourselves with Switzerland, for example. Instead of 8, it only has about 3.5 percent inflation – although Switzerland and Germany are in a similar environment.
Does that mean that, since Switzerland is not in the euro, 6 of the 8 percent inflation is currently due to ECB policy? Doesn’t that contradict your statement that corona and the Ukraine war are to blame for it?
Seidl: From 2008 to 2022, financial assets in Germany rose from 4 to 7.5 trillion euros. But the money supply was neutralized to a considerable extent – in other words: saved. It could therefore be spent on price increases resulting from lockdowns and war, thus fuelling inflation. By the way, when it comes to sanctions against Russian raw material imports, the EU has gone too far – what a fail!
“Open Nord Stream 2 – inflation would be cut in half”
What do you recommend?
Seidl: Pressure on Putin can be effectively exerted through export sanctions for Western technology. But sanctions on raw material imports hit us harder than him. The Turkish president Erdoğan recently summed it up when he said the West was now reaping the harvest that it had sown.
The war cannot be stopped by not importing raw materials. Because everything that Russia needs to wage it, weapons, equipment, ammunition, has long been produced. And as far as the payroll for his soldiers is concerned – Putin can solve that like Draghi did with the euro bailout: He simply prints the necessary roubles. So, what are these sanctions for? If North Stream 2 (before it was blown up) were to open instead, our inflation could be at least halved! But one branch of North Stream 2 is still intact!
Doesn’t what applies to these sanctions on Russia also apply to ECB policy? Changing them should also lower inflation, right?
Seidl: Of course! Because the euro area today is basically a transfer union. This means that not only the jump in the euro money supply from 876 billion euros to around 6 trillion euros can be traced back to ECB policy. This process continues today, because we continue to cover the budget and foreign trade deficits of the weak euro countries. If this transfer union were to be ended, that would of course relieve inflation. But there is hardly any prospect of that because a lawsuit against this before the German Federal Constitutional Court (judgment of May 5th, 2020) basically failed, since the court had only ordered that the ECB had to prove within three months that the transfer aid was proportionate.
However, the ECB has given its written justification the attribute “confidential” – i.e. secret – which means that nobody is allowed to look at it. So we don’t even know what’s inside and whether it’s actually convincing. But we have to live with the fact that the Federal Constitutional Court of Germany considers it convincing.
I wrote an e-mail to the then president of the German Federal Constitutional Court, asking why the Bundesbank had not been banned from participating in these fiscal transfers and the prospect of lifting the ban if there was a convincing justification. Then the judgment of the Federal Constitutional Court would have had bite and secrecy would not have been possible. But of course, I never got an answer to my question.
“Constant abuse by the ECB”
You also criticize the new purchase program of the ECB, keyword “open market policy”. What is it about?
Seidl: The idea behind the open market policy is that the ECB can use it to buy and sell securities. In fact, it no longer sells the securities it has bought – instead it holds them until their maturity and in some cases beyond. The ECB misuses the open market policy to finance governments by buying and holding their securities – instead of trading them as the open market policy actually provides!
They also abuse it when the bonds mature: a country pays off its debts – but the ECB buys securities from the country for the same amount, so that the country immediately gets back the debt payment it has already made. Yes, sometimes the ECB buys even more securities than pure debt repayment, as is currently the case in Italy, where less maturing German bonds are being replaced in exchange for excess purchases of Italian bonds. The total amount of the replaced securities remains unchanged, but their structure is changed.
All of this is abuse, but the ECB does it all the time and in all sorts of forms. But anyone citizen who thinks that none of the ECB’s policy has anything to do with their daily life is mistaken – for example, if they will face rising inflation in the future.
* Translated into English and republished with kind permission by the author from the original publication on Junge Freiheit.