The Panacea Canard

Bundesbank chief Jens Weidmann has an FT op-ed arguing that monetary policy is not a “panacea” for the world’s problems. This kind of thing drives me crazy. The following is a list of policy options that are a panacea:

  1. Nothing.
  2. Nothing else.

And here is my list of problems that can be solved with a magical “silver bullet”:

  1. None of them.
  2. Not that one either.

The use of these formulations is almost invariably evasion and excuse making. Weidmann has a job. His job is to do monetary policy. If he, personally, is more interested in budget policy or labor market regulation than he ought to quit his job and go get a different one. It turns out that better budget is not a panacea and that better labor market regulation is also not a panacea. That’s life. But, again, Weidmann’s job is to do monetary policy. Right now in Europe we have a number of countries “in crisis” including major nations such as Spain and Italy. The monetary conditions that the European Central Bank has set are inappropriate for the situation facing Spain and Italy. If a European central banker wants to help Spain and Italy, what he should do is implement monetary policy that’s more appropriate to Spanish and Italian conditions. If he doesn’t want Spain and Italy to have appropriate monetary policy—perhaps because he’s a German and at the end of the day he cares more about German conditions—then he should say something like “Spain and Italy are being crushed by inappropriate monetary policy, but I don’t want to change it because of German considerations” not offer pious lectures about what is and is not a panacea.

As I’ve said before, the Spanish government should probably recognize that expecting the ECB to set appropriate-for-Spain conditions is unrealistic and just leave. If Weidmann agrees that the ECB will never give Spain appropriate monetary conditions, then saying so clearly would help us move out of this cul-de-sac. But if he doesn’t want to say that, then he could influence the situation in a constructive way by changing European monetary policy. That’s not a panacea, but it is Jens Weidmann’s job.