G 20 ECB Dissent

The Age - Business News, World News & Breaking News in Australia

G20's global cash splash infuriates European Central Bank
Ambrose Evans-Pritchard, Telegraph, London
April 9, 2009

THE European Central Bank has launched a blistering attack on G20 plans to use the International Monetary Fund to pump liquidity into the world economy, calling it "pure cash creation" outside the normal mechanisms of control.

"This is helicopter money for the globe," said Jurgen Stark, the ECB's chief economist and Germany's member on the bank's executive board. "There hasn't been a study to see whether the world needs additional liquidity. In the old days one would take a long time to explore such a thing," he told the German business newspaper Handelsblatt.

The newspaper cited an "unidentified" central banker protesting that the G20 had rammed through radical changes that could do "irreparable damage" to the global financial system. He added: "What is happening with the IMF is scandalous. They are going to lay waste to everything in this crisis as a result of political horse-trading."

Markets have been in confusion over the implications of the G20 deal for the IMF to issue $US250 billion ($A355 billion) in special drawing rights (SDR), a hybrid instrument that lets governments take out an overdraft but also contains the seeds of a global currency.

The summit communique stated clearly that the purpose of activating the SDR powers was to "inject $US250 billion into the world economy and increase global liquidity". This is separate from the move to triple the IMF's fire-fighting fund to $US750 billion. If used to create liquidity, the plan turns the fund into a proto-central bank for the world, running an expansionary monetary policy over the heads of central banks.

It appears G20 delegations from Germany and other European Union states may have signed the agreement in last Thursday's rush without studying the details. SDRs on this scale pose an immediate threat to the ECB, worried about resurgence of inflation once recovery begins.

Dennis Snower, head of the Kiel Institute for the World Economy, said the scheme not only risked inflation but incubated crises, allowing badly run countries to put off the day of reckoning. "If the international community does not take steps against this, the future bill for this stimulus could prove expensive," he said.

The dispute between the ECB's hawks and policymakers in the rest of the world stems from a disagreement about the nature of this crisis. The IMF fears events similar to those of the early 1930s, warning of civil unrest and even wars.

Berkeley professor Barry Eichengreen, an expert on the Great Depression, said global industrial output had been declining more steeply in the past nine months than in the early 1930s. World trade had also fallen faster. "It's a depression all right," he said.