Like many Germans, Otmar Issing has been alarmed by his country’s inflation soaring to a 40-year high and worried about the ECB’s “misguided” response. But as one of the founders of the euro, Issing’s complaints are more important than most of his compatriots.

The ECB’s first chief economist when it was established in 1998 said the central bank was suffering from a “misdiagnosis” of the factors behind the price surge and was “living in a fantasy”, downplaying the danger of a price surge. Inflation out of control.

“The ECB has made a huge contribution to this trap that we are in now, because we are facing the risk of a stagflationary environment,” said the 86-year-old, who decides interest rate policy.

His criticism that the ECB is raising rates too slowly underscores the Intense debate in Germany and most of the Euro 19 On how quickly it should reverse eight years of ultra-loose monetary policy – including negative interest rates and 4.9 trillion euros of bond purchases.

After struggling to lift inflation to its 2 percent target over the past decade, the ECB is now facing the opposite problem. Consumer prices have been rising as European economies rebound from a deep recession caused by the pandemic. March, Eurozone inflation A new record of 7.5%.

“Inflation was a sleeping dragon; the dragon has now awakened,” Ising told the Financial Times from his home in Wurzburg.

The ECB Governing Council met this week in Frankfurt to discuss whether to speed up plans to phase out stimulus by ending net bond purchases in the third quarter.Some of its policymakers argue last month’s meeting End bond purchases early to set the stage for a rate hike this summer.

Many central banks, including the Federal Reserve and Bank of England, have stopped buying bonds and started raising interest rates.

“It’s clear that the ECB has been slow to respond, and the Fed may be further behind the curve,” said Ising, who has chaired the Center for Financial Studies at Goethe University in Frankfurt since leaving the ECB in 2006.

His former colleagues at the ECB predict that many of the factors driving up energy, food and other commodity prices will fade rapidly from the end of the year, helping inflation fall below 2 percent by 2024.

But Issing said that ignores the risk that the pandemic and Russia’s invasion of Ukraine will send inflation higher by reversing 30 years of inflation. globalization Europe has accelerated its move away from fossil fuels as trade tensions mount and companies make supply chains more resilient.

“The ECB relies on its forecasting model, which fails to give the right signal because it is based on past and cyclical experience — and the pandemic has not led to a cyclical recession,” Ising said.

“In times of structural change, you need a broader approach to explaining inflation. If you have a misdiagnosis, of course, you have a misguided policy.”

Other German financiers also stepped up their criticism of the ECB. Christian Sewing, chief executive of Germany’s largest bank Deutsche Bank, said last week that soaring inflation was “poison to the stability of our economy and society” and that the ECB was “urgent” to act.

Outgoing UBS chairman and former Bundesbank president Axel Weber told financial newspaper Handelsblatt that it was “incomprehensible” that the ECB took so long to reverse policy. The country’s best-selling tabloid, Bild Zeitung, has started referring to ECB President Christine Lagarde as the “Lady of Inflation”.

Germans have a deep-seated fear of inflation, a fear that Ising says “can be traced back to hyperinflation in the 1920s and currency reforms in the 1940s.” . . it’s pretty much ingrained in the public’s genes”. But he said these concerns “are not just Germans sick with inflation – you can observe this in all countries”.

Several ECB policymakers – including Chief Economist Philip Lane — have said they can do little to address the external factors driving up energy prices, while they worry that raising interest rates too soon could lead to a severe recession — especially if the war in Ukraine disrupts the flow of oil and gas from Russia to Europe.

Both Lagarde and Ryan said the ECB could even introduce a “new tool” to support countries facing a sharp rise in borrowing costs as interest rates rise. Their staff is already working on this “crisis tool” to target sovereign or corporate bond purchases when needed.

Issing agreed that now is “not the time to raise rates to higher levels”. But he said the ECB’s stimulus had been in place for too long and was “hard to defend” given the rebound in growth and inflation while unemployment had fallen to historic lows.

“The ECB has been fantasizing about continuing this policy without any negative impact,” he said. “If they had started normalizing policy earlier, they would have been better off, or at least not as bad – a fact that war shouldn’t distract from.”

The prospect of a “stagflation” scenario of rising inflation and slowing growth is the “worst combination” for central banks, said Issing, who compared monetary policymakers’ responses to two oil shocks in the 1970s.

Ising, who joined the Bundesbank in 1990, said: “The Bundesbank tried to control inflation, and the result was moderate inflation and a moderate recession. But “the Fed waited too long” and the U.S. had “double-digit inflation and deep, deep decline”.