Dear Christine Lagarde,
congratulations on your most likely nomination as the head of the European Central Bank. Your work will shape what will become of this continent, and because of that, I kindly request that you consider the following in your future decisions.
European governments are currently playing chicken with ECB, expecting ECB to do whatever it takes to ensure economic growth in the EU area. If ECB folds, the governments will postpone all politically difficult structural reforms to the future. In short to medium term this will escalate to a moral hazard situation, where countries will up the ante compared to their neighbours on how much deficit they can run.
This will significantly slow the growth in the productivity of labour in Europe, which will make us less competitive in the global market, resulting in decline and eventual economic surrender towards China and the USA. They say that in the long term we are all dead, but this can happen in a few decades already, and many of us would be alive to see this happen still.
In order to get our nations to do what it takes, the interest rates must be raised to a healthy level and kept there. The interest rates act like the bridle of a horse. If kept tight, the horse will run straight, if kept loose, the horse will go to the meadow and eat itself fat and lazy. And just to be clear, the horse is a metaphor to a democratically elected government.
The trick is of course how to raise interest rates without ”burning down the house.” In my view, the ECB should introduce a new tool to create inflation, the citizen dividend. In practice, a small amount of helicopter money would be distributed by ECB directly to all EMU citizens each day until the desired inflation level is reached. After that, ECB should raise the interest rates to a healthy level (I'd estimate 3% would suffice) and lock them there. After that, adjusting the citizen dividend amount would be the only tool to meet the desired inflation target.
Raising the interest rates would burst asset bubbles here and there, but in terms of the real economy, it does not matter who owns the assets or how high their valuation is. The consumer supply (employment) and demand are the relevant factors that central banks should concern themselves in terms of the real economy, asset prices are just phantom wealth.
Liberal Party of Finland