Euro’s founding father: ECB is ‘living in a fantasy’ about inflation

Otmar Issing said the European Central Bank’s slow response to inflation posed a risk to growth, in an interview with the FT. So, one of the euro’s founding fathers, he said the ECB had “lived in a fantasy” and downplayed the risk of rising prices.

Inflation has surged to record highs in the eurozone, but the central bank has not yet raised interest rates to tackle it.

Issing believes the European Central Bank has been far too slow in responding to inflation and risks tilting the single currency bloc into “stagflation”, where prices continue to rise, while growth slows. Issing, who was also the ECB’s first chief economist in 1998, reprimanded the central bank for downplaying the risk of soaring inflation and not tightening monetary policy fast enough to deal with it.

“The ECB lived in the fantasy of continuing this policy without any negative consequences,” he told the Financial Times in an interview. “They would be in a better, or at least a less bad, situation if they had started to normalise policy before, the war should not distract from this fact.”

Issing said the ECB had misjudged the factors that have caused the surge in inflation.”The ECB has contributed massively to this trap in which it is now caught because we are heading towards the risk of a stagflationary environment,” Issing said.

Annual eurozone inflation jumped to record highs of 7.5% in March, up from 5.9% the month before. Skyrocketing energy prices contributed significantly to inflation, as Russia’s war with Ukraine sent commodity prices soaring.

The ECB will hold its next policy meeting on Thursday and has signalled it is concerned about inflation, but economists said the threat to economic growth and rising energy prices and the uncertainty around the impact of the Russia-Ukraine war might affect how aggressive it is in tightening monetary policy.