>> GROUP: Shadow ECB Council / EZB-Schattenrat  Prof. Dr. Merijn Knibbe

Prof. Dr. Merijn Knibbe: The ECB should make clear that it is ready to guarantee the refinancing of existing government debt against reasonable rates (including Greece). At this moment we still run the risk that government interest rates for whatever reason (election of a Berlusconi paragon?) suddenly explode even when a country runs a government surplus and with as a consequence a disorderly disruption of the Euro area. This is avoidable, so why should we want to run that risk? Aside: restricting the contingent liabilities of the government by forcing banks to increase equity to a more reasonable level will solve at least part of the problem of the sustainability of government debt.

At the same time, wage pressures are ever lower while expenditure based measures of inflation are subdued which means that there is little reason for higher rates. Asset price inflation is rampant in some countries (houses!) but the possibilities for macroprudent policies are, when it comes to house prices, far from exhausted (interest deductions still exist, land taxes are often low to non-existent etc.) though, with regard to house prices, there are quite some differences between developments in Germany (high house price inflation) and Italy (stagnant/declining) are sizeable. These differences indicate that national macropru policies are more appropriate than Eurozone wide policies. Aside: abolishing interest rate deductions will solve part of the problem of the sustainability of government expenditure and, in the very long run, household debt – a win-win situation.

All in all I do not see reason to raise rates, surely not when we also take the very strong increase of the exchange rate of the Euro into account.
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