Federal Reserve accused the European Central Bank (ECB) of creating a state debt crisis that could have been avoided, a crisis that it did not understand and used incoherent policies, according to the Daily Telegraph.
“The ECB lacks a coherent strategy for creating the monetary base required to sustain the money creation necessary for a growing economy,” according to a document prepared by the Richmond Federal Reserve, one of the 12 institutions supervising the Federal Reserve System in the United States.
The document was written in July and signed by the chief economist of the Richmond Federal Reserve, Robert Hetzel.
The U.S. central bank advised the ECB to print more money to stimulate the European economy using the model of quantitative easing adopted in the United States after the 2008 financial crisis.
Fed asked the ECB to take direct action to taking over from the banking system packages of loans to small businesses, as well as packages of government bonds in the euro area including German securities.
“The ECB will have to be clear that surplus countries will experience inflation above 2 percent for extended periods of time,” and will have to be prepared to “explain to the German public” that this is desirable.
However, supervisory institution of the eurozone should better understand the problems of the European economy and act accordingly, believes the Fed.
“Most important, the ECB needs to start by recognising that Europe’s problems are more than structural. It needs to stop using monetary policy as a lever for achieving structural changes and to end its contractionary policy.”
Thursday the ECB has maintained the policy rate at a historical low of 0.5% and the institution’s president, Mario Draghi, said that there are signs of a “gradual recovery in economic activity in the remaining part of the year and in 2014.”
“The ECB should be cutting rates to zero to offset this. We have had some improvement in confidence, and localised credit easing in some countries has helped, but it is a very open question whether this is a sustainable recovery,” said Jacques Cailloux from Nomura, talking about the repayment of €1 trillion in bank loans. The banks repaid 60 percent of the money, a good sign of the banking sector, while it automatically forced the borrowing costs to go up.
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