March 27, 2019 / 5:56 PM / 5 months ago

ECB's Villeroy sounds alarm on big-spending monetary theory

GENEVA, March 27 (Reuters) - History does not smile favourably on countries that give into the temptation of financing public spending by printing money, ECB policymaker Francois Villeroy de Galhau said on Wednesday, weighing into a growing debate on monetary theory.

Villeroy, who is also governor of the Bank of France, warned that the increasingly popular Modern Monetary Theory, or MMT, backed by U.S. progressives risked fuelling an inflation surge.

Modern monetary theorists suggest that countries with the power to print their own currency can freely create money to finance government spending, as long as inflation is kept under control.

The country can not be forced into default because it can print money to pay creditors, as the theory goes.

"Unfortunately history - or geography in the case today of numerous developing countries - proves time and again that countries that wanted to monetise their debt faced very unhappy economic times," Villeroy said at a conference in Geneva.

"The big risk is inflation or even hyper-inflation. That's why central banks and not fiscal authorities are in charge of the inflation target," added Villeroy.

While most academic economists pay the theory little heed, it is increasingly attracting interest from some left-wing U.S. Democrats, like Congresswoman Alexandria Ocasio-Cortez.

Villeroy said that monetary policy objectives like keeping inflation under control must trump budgetary objectives like stimulating growth, and the best way to do so was to ensure central bank independence.

That said, he added that it was a fair question to ask what is the right level of public debt, especially in light of currently low borrowing rates. (Reporting by Tom Miles, writing by Leigh Thomas)

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