Time for Reforms

On 15 December, Volker Wieland, Director of the Institute for Monetary and Financial Stability (IMFS) at Goethe University Frankfurt and member of the German Council of Economic Experts, presented the key findings of the Council’s Annual Report 2016/17 and shared his insights on the current monetary policy. The lecture was jointly organized by the IMFS and the SAFE Policy Center and moderated by Jan Pieter Krahnen, Program Director of the SAFE Policy Center.

The Report’s title “Time for Reforms” is, first of all, addressed to Germany. As Wieland elaborated, economic policy should focus more on the German economy’s competitiveness. In contrast, the topic of inequality, income and wealth distribution, which is a subject of keen debate in Germany, is less important, in his view, as inequality has remained largely unchanged during the past decade. As an example for a necessary reform, the Council suggested to link the retirement age to longer life expectancy in order to ensure the long-term sustainability of the statutory pension scheme.

With respect to the current monetary policy in the euro area, Wieland pointed out that core inflation has been fairly stable throughout the last decade. Therefore, the expansionary monetary policy of the European Central Bank (ECB) is not adequate and increasingly threatens financial stability, he warned. The ECB should normalize its monetary policy and slow down its bond-buying program. Monetary policy could stimulate demand, but it cannot create sustainable growth, he said.

A further focus of the lecture was on the need for structural reforms in the euro area. Without the readiness for fundamental reforms, the long-term economic viability of the EU cannot be secured, Wieland said. In order to bring Europe closer to its citizens again, institutional reforms should reinforce the principle of subsidiarity. Fiscal policy, labor market policy and social policy should remain national responsibilities. With respect to the current developments in Italy, he advised the Italian government to apply for a program at the European Stability Mechanism (ESM), preferably including the International Monetary Fund. Both institutions would put up the pressure needed to implement reforms.

Link to the Annual Report