As the Euro area lurches from crisis to crisis with many member states suffering with potentially unsustainable debt burdens and questions being raised about the future of the common currency, it is good to know the ECB still has its eyes firmly fixed on the real economic danger: Inflation possibly going above two percent. In case anyone had doubted their dedication to this righteous cause, M. Trichet reassured us on Thursday:

Lastly, we will continue to be permanently alert, and to be sure that we have the right monetary policy stance. Our credibility rests on the fact that we deliver price stability, in line with our mandate. It is the Treaty mandate. We delivered 1.97% yearly inflation over the first twelve years of the single currency. You will tell me that I repeat that, but I think it is very important. By the way, I said this to the Members of the European Parliament in Brussels two days ago, and I could see the extent to which, as representatives of the European people, they appreciate the fact that we delivered our primary mandate over the first twelve years. We even had applause. I was quite moved.

Touching indeed.

21 replies on “Vigilance”

Is it really as hard to exit the Eurozone as Barry Eichengreen makes out? Can’t the Central Bank’s printers in Sandyford just put some new plates on the machines over Christmas?

I was quite encouraged by the report, in Saturday’s Irish Times, that Merkel is threatening to take Germany out of the Eurozone. It looks like a win-win proposal to me. In principle I favour European monetary union, but only when the central bankers have outgrown the notion that if they take care of the rate of inflation the magic of the market will take care of everything else.

The return to normality following a breakdown in the chain of intermediation is contingent on the resumption of normal liquidity mechanisms and a continuation of suppressed inflation expectations.

This week, I will mostly be eating leprechaun fois gras…

Trichet didn’t spend the hour talking about inflation; he was making this point about inflation for his German audience.

He may be able to chew gum and walk straight at the same time.

On Friday, the FT’s story on the press conference was headed: Trichet lands ‘cunning’ blow in crisis fight

Like a boxer wanting more power for his punch, the European Central Bank is trying a new tactic to combat the eurozone crisis: moving to catch financial markets unawares…

That under 2% inflation really looks great with coupled with 20% unemployment and massive bank fraud!

We’ve had massive inflation since 2002 (ie. increases in money supply). The money(credit) went into property price increases.

What I think they are really afraid of is energy price increases. This will torpedo all western economies – especially Germany and the US.

Notice the spot price of crude lately? Over $ 85/bl. This had better drop back to $ 70ish soon or within 6 months energy price rises will feed through. That should be fun!


Give the man a fiddle — it would be more productive. What are the bond markets to make of this kind of lunacy — well, a perfectly rational reaction as we have seen.

Price stability is part and parcel of a sound Euro. If the market perceives a softening of resolve wrt to inflation the conclusion drawn is the Europeans will inflate their way out of their debts. Euro rates for five to ten year obligations will then increase markedly. Ask yourself how this will help a heavily indebted country like Ireland.

“If the market perceives a softening of resolve wrt to inflation the conclusion drawn is the Europeans will inflate their way out of their debts. Euro rates for five to ten year obligations will then increase markedly. Ask yourself how this will help a heavily indebted country like Ireland.”

Hmm, by inflating away our debts? To be sure nominal rates would increase to reflect increased inflation – but the stock of debt (i.e. the principal) would not change, hence would decline in real terms.

Ireland has now decoupled from Europe and would benefit very little from QE or very low interest rates at the ECB level. I see it as Argentina tied to the dollar and perceived to be close to collapse. The USA engaging in QE or loose monetary policy benefited Argentina not at all in the circumstances in which it found itself in 2001. The market perception of Ireland now would be a country close to collapse tied to a monetary union that was itself weakening. The Germans by saving themselves are saving us. Left to our own devices we would be unsalvageable. The easy way out is not the best way out.

I know what you are getting at but to be fair to Trichet he always refers to “price stability” rather than banging onabout inflation. He would argue his position covers the risk of deflation too and he wouldn’t be doing his job if he was bothered about deflation in an isolated outpost in the sea. He has a Budesbank constituency to cater to that might eventually be persuaded, er, one day, but he cannot leave them behind – he works for them.

We all can be good hurlers on the ditch or should it be in the ditch?
Trichet of course is going to highlight positive aspects about the Eurozone — have there been any?

It was often claimed that America was a better jobs machine than Europe but not in the period 1999-2008; in answer to the question on a number of recent surveys which found that 47% of Germans want their Deutschmark back, the answer was that for Germany, inflation has stood at around 1.5% since the inception of the euro, the best result for Germany and indeed the euro area as a whole in 50 years.

If the ECB press conference merited a thread, it should have been the emphasis on the responsibilities of governments – – the ECB after all is not responsible for fiscal policy – – and the signal that the rescue fund should be increased.

Besides who would object to the clear position on governance: “not only in Germany, but also in France and Italy – that in 2004 and 2005 there was a meeting of minds of respective Governments with a view to destroying the Stability and Growth Pact. I have to say.”

Anti-EU sentiment comes easy these days but this is the most successful multilateral system in history; it would have been easier and self-centred if the original six had kept their closed club and did not allow poor countries like Ireland to join. Now with 27 members, the decision making process isn’t ideal and the Eurozone governance system has obviously failed.

German finance minister Wolfgang Schäuble highlighted the dilemma for policymakers in Paris last week: “While the financial markets want a European responsibility for financial and budgetary policies, public opinion does not.”

In June 2008, the European Central Bank celebrated its 10th anniversary and Jean-Claude Trichet said: “This historic vision has always been closely associated with the search for prosperity and the preservation of peace. Voltaire’s remark: “En effet l’histoire n’est que le tableau des crimes et des malheurs” – “Indeed, history is nothing more than a tableau of crimes and misfortunes” – from the perspective of the mid-twentieth century could not have been more apt . It is no surprise that it was at that point in time that Europeans decided to accelerate the march towards European unity.”

“It is the Treaty mandate.”

Trichet keeps referring to the legally defined goals of ECB. This is important.

People in Trichet’s position often reassure themselves that it is up to legislatures to amend legislation if it is not effective and it is up to them only to do what the legislation tells them to do. The corollary is that it would be fundamentally undemocratic for them to exceed their democratic mandate.

All the while the German Constitutional Court is happy to take the lead on interpreting the Treaties.

Unfortunately, this is a stress point in democratic systems. Generally one is on the side of the person sticking to the democratic procedures rather than the technocrat deciding to overrule the will of the people because he knows best.

Ireland is playing its part in subverting the natural legal order by guaranteeing banks and protecting senior bacnk debt while at the same time the ECB sticks the the letter of the law. Of course, that is a blinkered churlish comment when the ECB have bought our bonds on the secondary market, have allowed NAMA loans be repo’d and have provided emergency liquidity.

Everybody has to bend both ways at once. Would Marx have positted a duality in the ECB’s role?


I don’t get your point? My point is that on the one hand the ECB is genuinely constricted by the legal definitions of its role and aims and on the other hand the ECB is under severe pressure to redefine it goals so as to gve higher priority to problems than more pressing than price stability. Independence does not come into it save that the ECB is constrained from acting independently from its democratically forged fetters.


“… Everybody has to bend both ways at once. Would Marx have positted a duality in the ECB’s role?”

Be second nature to Marx (who would not recognize present economy/society – must get him on the holodeck sometime with 7_of_9) who waded through Hegel on his way to his magnum opus. Thought you did this stuff in pre-school, in Paris, and during the long march (-;

The duality is particular and general, and general supercedes particular as we know since last week-end. It has obviously not balanced these very well in recent years …… lessons for Europe, and our particular cost.

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