EUROPEAN financial circles are abuzz over Central Bank Governor Athanasios Orphanides after he appeared to take on the German Bundesbank members on the board of the European Central Bank (ECB).
The ECB board in recent days appears to be split on whether further interest rate cuts would be possible in 2009.
Several reports have Orphanides leading the charge against the “established order” led by the Bundesbank.
On December 10 and 11, ECB board members Axel Weber and Jürgen Stark – the Bundesbank men – cautioned against cutting interest rates to below 2.0 per cent. Stark said the scope for further rate cuts was very limited, “potentially allowing for small steps only.”
On the evening of December 11, however, Orphanides, subtly hit back in a speech delivered in Greek to the Larnaca Chamber of Commerce, when he said lower or even zero interest rates would not hinder Central Bank expansion policies.
“I wish to clarify that the idea that monetary policy becomes ineffective and cannot provide expansionary impetus when the short term interest rate is very low (or zero) is a fallacy,” he said.
Orphanides said zero interest rate was “not a bound on further monetary expansion”.
“To be sure, monetary policy is more challenging in such circumstances and the stance of monetary policy is harder to infer from short-term interest rates. But these challenges do not limit the effectiveness of monetary policy,” he added.
“Needless to say, at the Governing Council of the ECB we follow macroeconomic developments closely and we are always ready to take further action when this is deemed appropriate.”
A subsequent article in the Telegraph said it was the first time since the launch of the monetary union that an ECB board member had “dared to confront the hegemonic Bundesbank bloc in public”.
“[Orphanides] rebuts the ECB obscurantism that has so shocked economists, and so dismayed those who fear that the ECB’s Brüning-Luther drift into debt deflation will reduce Europe to a bonfire of riots and a splintered bedlam of neo-fascists, Marxists, and assorted tribal reactionaries,” said the Telegraph.
It went on to describe Orphanides’ US Federal Reserve credentials and renowned scholarly achievements.
“In other words, he is more than a match for the haughty duo from the Bundesbank – Axel Weber and Jürgen Stark – and everybody in the tight-knit fraternity of central banking knows it. His speech is finally to say to the Old Guard: enough, we have endured your view of the world for long enough, step down, make way.”
The paper said Weber and Stark had been up to “their old tricks”, attempting to pre-empt the ECB and tie its hands by signalling there would be no room for rate cuts next year.
“Except that this time Orphanides has dropped a neutron bomb on their heads,” it added.
It then quoted the Cypriot Central Bank Governor saying: “We’re in the middle of an extremely crucial economic phase where economic activity rates are slowing down, financial values are fluctuating and the uncertainty in the financial markets is continuing. It is alarming that, unfortunately, a vicious cycle has been created between the financial system crisis and the slowdown of economic activity in the real economy. This development imposes determined decisions of macroeconomic policy.”
Orphanides’ comments were now creating a mutiny within the ECB board, the Telegraph said.
Malta’s Central Bank Governor Michael Bonello said: “So what matters? One man, one vote in the ECB council. Or the unwritten law that the Bundesbank cannot be overruled in EMU because the euro derives its status from the D-Mark legacy? We will soon find out.”
