Member of ECB board says decision at G20 summit could cause inflationary problems

EUROPEAN CENTRAL Bank (ECB) executive board member Juergen Stark has criticised the decision at the G20 summit to boost the International Monetary Fund’s special drawing rights (SDRs) as ill-thought through and potentially inflationary.

Mr Stark said the decision could spark inflationary problems by creating “helicopter money”.

Last week leaders from the G20 wealthy and emerging economies agreed to support a general allocation of $250 billion (€188.2 billion) worth of IMF’s SDRs – options to tap IMF funds – alongside other measures to boost the fund’s firepower.

Under the plans, countries hit particularly hard by the global economic crisis would be allowed to increase their SDR share by using those of other countries which may not need them.

The results of the G20 summit have been broadly welcomed by policymakers, including the ECB’s president Jean-Claude Trichet. However, Mr Stark questioned whether this decision was needed and asked had been properly thought through.

“That is pure money-creation. That is helicopter money for the globe,” he told German business daily Handelsblatt in comments later confirmed by the ECB.

“There was no examination of whether there is a global need for additional liquidity at all . . . One used to take a lot of time to examine something like this.”

“Helicopter money” has become a phrase linked to pumping money into the economy as an extreme response to the threat of deflation.

In 2002 Ben Bernanke, then a Federal Reserve governor and now its chairman, gained the nickname “Helicopter Ben” after he quoted an argument by monetarist US economist Milton Friedman that money should be dropped from helicopters if an economy slid into deflation.

Mr Stark is not alone in having concerns about the G20 decisions.

IMF chief Dominique Strauss-Kahn acknowledged this week the move to boost the fund’s firepower carried inflationary risks.

However he has played down the significance in the current climate.

“The only drawback is the inflation risk, but it’s limited at the moment,” he told French newspaper Le Figaro on Monday.

The concerns about future inflation come even as some major economies look closer to deflation.

The financial turmoil and subsequent sharp slump in demand and commodity prices have seen inflation in the euro zone drop to an an all-time low of 0.6 per cent, well below the ECB’s own target of just under 2 per cent.