The ECB’s Inflation Target

The Eurozone HICP inflation index for February was at roughly the same level it had reached in the early months of 2012. That is to say the inflation rate has been essentially zero for four years.
The cumulative impact of this undershoot on the real burden of debt is getting to be very serious. The ECB’s own forecasts are for just 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018, so they expect the undershooting to continue. By this time next year the price level will have been flat for five years. If GDP deflators had risen at 2% per annum for those five years various indebted countries would have knocked ten points off debt/GDP ratios, other things equal. So the ECB policy failure has consequences and has penalised the countries most heavily indebted.
Unlike the situation in the UK, the USA and other inflation-targeting countries there is not even a clear figure. The phrase (intoned at every Draghi press conference) is ‘below, but close to, 2%’. Why so coy? What does ‘close to’ actually mean? Will the 1.6% predicted for 2018 be deemed to have done the job?
The treaty talks only about price stability so the choice of target is entirely a matter for the ECB Governing Council. The tortured phraseology looks like a compromise – the sound money people getting the ‘below’ part and the rest getting the ‘but close to’. The 2% number had to get a mention, since various central banks had settled on an explicit 2% figure. It would hardly have been feasible to publicly declare a lower target number like 1% and would have had market repercussions. Whichever scribe came up with the form of words has hopefully been promoted.
Suppose the measures announced last week have their desired impact and Eurozone inflation reaches somewhere deemed ‘close to’ 2% in 2018. By that stage the heavily-indebted countries will have been short-changed substantially on real debt burdens. The remedy would be to raise the target, say to 4%, for five or six years in order to compensate, as Olivier Blanchard proposed when he was at the IMF. The indebted countries would be remiss not to push for this when the time comes, assuming the show is still on the road.

60 replies on “The ECB’s Inflation Target”

The trick with borrowing has always been to do it in a sufficiently inflationary environment to have the principal deflated away. When the herd borrows to finance additional capacity it guarantees that doesn’t happen.

What is the ECB being criticised for not doing currently?


You ask ‘What is the ECB being criticised for not doing currently?’ which is a fair question.

It could immediately clarify that the inflation target is actually 2% which would help (a little). If (when) QE and negative interest rates are seen to have come up short it will have to contemplate doing ‘whatever it takes’. It would be helpful if the ECB could address now what options are available within its mandate.

The ECB Governing Council is not free to target any rate of inflation because the Treaties make price stability the ECB’s primary objective. The Governing Council has defined price stability as HICP increases of less than 2% y-o-y over the medium term. Inflation below, but close to, 2% is said to be “low enough for the economy to fully reap the benefits of price stability” .

No doubt debtor countries would like to inflate away their debts but they gave up that option when they joined the Euro Area. However, the ECB recognises the risk that when inflation in the Euro area approaches zero, there will most likely be deflation in some countries. Also, HICP may slightly overstate inflation, thus failing to identify periods of slight deflation. Hence, Draghi is trying to raise inflation but only be a very narrow margin, a tricky balancing act when markets are fragile.

The price level is already too high in Ireland, 20-25% above the EU average. We need lower prices, not more inflation. The cost of legal / medical / rents services are already way too high.

I realise the call here is for a higher inflation target, as very low inflation is a symptom of weak demand.

But do people across the eurozone want higher inflation? No, they want nominal wage increases ahead of inflation. They want real wages to reflect productivity gains, rather than real wages falling.

Colm, you’re likely going to be long in the tooth before seeing a 4% inflation or interest rate.

According to economists at Danske Bank, 30-year inflation expectations in Europe and the US are now 1.6% and 1.8%, respectively. Basically the markets are saying that neither the Fed or the ECB will be able to fulfill their mandates for the next 30 years!

In the early 1990s Italy had a debt service ratio of 12% of GDP; it had halved a decade later and is now just above 5% on higher debt but Japan has a ratio below 1% and it has had near zero rates for 20 years.

Soon with maturities, most debt will be at low single digits.

Interest rates are at the lowest since Babylonian times 5,000 years ago; the Bank of England founded in 1694 never had a rate below 2% until 2009 and the current 0.5% official rate has been unchanged for 7 years.

There are short-term issues in the Euro Area such as demand and the banking situation in places like Italy is still poor but income of the 23 biggest banks in the EA rose by a third in 2015 to €60 billion.

Long-term, declining population and possibly falling productivity (a factor that economists may not be able to realistically measure) are putting a downward pressure on rates.

With the decline in manufacturing, services typically require less than monetary investments.

The OECD says the innovation diffusion mechanism from frontier firms has broken down. Despite the hype, German employment in high tech manufacturing and services is at 4.2% of the total; the US is at about 5% and the UK ratio is 4.7% — in countries such as Ireland where there is not a tradition of apprenticeship (now expanded to cover many job sectors) there is a skills crisis:

As Lefournier puts it, “No doubt debtor countries would like to inflate away their debts but they gave up that option when they joined the Euro Area.”

Any argument which is based on a failure to face up to this reality falls at the first fence.

From the NTMA:

“Net debt was likely close to 80% of GDP at end-2015, down from 87.8% at end-2014. This figure is conservative, as it gives no credit for the Government’s equity stakes in Irish banks to be monetised in the future.”

“The Department of Finance suggest there was a primary surplus of 1.5% of GDP in 2015. This figure is easily enough to lower the debt ratio, given the average interest rate on the stock of debt of 3.5% and nominal GDP growth of over 11%”

11%! If neo-liberalism is broken please don’t fix it!

The reason inflation is so low is because there is too much debt and ordinary people are not getting pay rises. Neolberalism is all about shunting money to the rich.
And neoliberalism doesn’t bother about targeting employment. The ECB only has one target viz 2% inflation. This is important because it reduces the real value of debt over time. 0% inflation and below are lethal.

It is no wonder the Swiss franc is trading at near parity with the Euro.

If you think about an average rate of inflation which has always been made of of a fluid (over time) mixture of rising, slowly rising, falling, slowly falling, and unchanged prices, there is no particular reason why the ‘natural rate’ of inflation would not vary over time with differing trends in macroeconomics.

It may be the case that in the late 70’s and early 80’s it was unrealistic for inflation to be anywhere near as low as 2%.

Similarly, it may be that the build up of excess capacity globally, and the after-effects of all that consumer spending which was brought forward from the future during the credit binge, have resulted in a scenario for the next few years in which it is unrealistic to expect the rate of inflation to rise to 2%.

In other words, the ECB’s interpretation of its mandate (stable prices) might be too rigid in determinedly targeting ~1.75% or so. If that is the case historians might eventually, with the benefit of hindsight, conclude they should have been more aware of the tidal context and chilled out a bit. It is possible that if the natural rate of inflation is now significantly lower than 2% the ECB could end up distorting market signalling, risk pricing and capital allocation to such an extent, in a futile attempt to target 2%, that they end up reducing economic output over the longer term. Maybe.

Why is inflation so low across the developed world? Weak commodity prices is obviously a factor but core inflation is also low, primarily reflecting the lack of strong wage growth even in economies with low unemployment. That points to globalisation and excess supply in the world economy.

If that is the cause then it is hard to see how buying bonds is going to have much effect. QE was introduced in the US after the crash to breathe life into capital markets, the main source of credit provision in the US. The rationale is less clear for the euro zone, where banks provide the bulk of credit.

Conventional wisdom has it that ‘Group Think’ was prevalent in the run up to the crash, as if it does not exist all the time. Right now, policy makers in Europe need to be questioned as to why the ECB is desperate to boost private debt while governments are urged to reduce public debt.

How does the new ECB loan subsidy scheme for banks accord with its mandate. Paying back less than you borrowed in nominal terms. Not bad. A great deal for bank executive and bank shareholders.
My car is a 2003 model. Can I have a loan like that please!! Who knows I might splash out!!

@ JF

Great news for the old Debt/GDP ratio. Notwithstanding the good news that the economy is growing, the problem with touting the Debt/GDP is that the GDP rise is going to one sector of the stateless population, while the debt remains firmly owed by the residents of the nation.

PS. I heard Roddy Doyle on radio this week say that during his time teaching in the 1980s, when ‘the country hadn’t a bean’, none of children he taught were homeless. Ireland has clearly come a long way since then.

My understanding was that population growth and technological advances would generate 2% growth anyway. This seems to have stopped under the ECB.

The ECB is engaged in what the medics call a dosage-response study. Peter Praet is reported this morning contemplating even further forays into negative territory. Sometimes increasing the dosage is not a good idea. George Magnus has a letter in the FT suggesting, fancy that, a change of medicine.

The relentless intensification of policies that fail to work is one of the wonders of the age.

“natural rate of inflation”? Isn’t it a monetary phenomenon? Anyhow, this is outside the ECB’s remit.

Magnus didn’t mention why the US congress , Japan or the Eurozone will not use fiscal policy. It is not allowed under neoliberalism because it gets in the way of shunting money to the very top, which is the whole point of the system and of the Eurozone.

Price stability may not be an absolute thing.

Thirty five years or so ago Paul Volker raised interest rates through the roof in order to counter inflationary forces. Similar stuff was going on elsewhere, notably in the UK.

There were significant effects on the real economy but inflation was tolerated way above 2% for years – because 2% was, at the time, unrealistic. Imagine what would have happened if there had been the same sort of intolerance of the quite small gap between current and target inflation that there is now.

There is outstanding debt and higher inflation numbers assist to deflate that way, and some people still believe that any slight deflation will cause consumers to stop spending – so all market watchers understand that there are reasons to try to get inflation up. The question is – how much of in incremental increase in inflation for what eventual cost for each new wheeze?

In portfolio management there are sayings such as: “Nobody ever got fired for buying Shell”. The central bankers version might be “Nobody ever got fired for bidding up assets”.

If you ignore the hawkish fringe that still thinks hyperinflation is around the corner (and almost everybody does ignore it then central bank watching has become boringly predictable – the only interesting part being that of guessing how many points have to come of the S&P for JY to have a re-think.

I might do the same myself, but the ‘easing trade’ for central bankers has the whiff of group-think and a crowded trade about it.


The left has imploded in terms of economic argument since 2008 – which is some achievement given the context. Even Corbyn has jumped on the anti-debt bandwagon, criticising Osborne as follows:

“…he has failed on the deficit and he has failed on debt”.

In the unlikely event that the right were to voluntarily hand over a silver platter marked “Looks like we were wrong!” to the left they would probably just must be a trap and hand it back with “Not falling for that one!” scrawled all over it.

The poor ECB is left with a model that made sense in the 80s but has lost all relevance now. The Bruce Jenner complex.

An awful lot of sov debt would have been priced/issued/bought on the assumption of 2% inflation. Generali has nearly Eur 64 bn of Italian debt. If its balance sheet was valued on a real basis that debt would be increasing in value every year under Bundesbank nihilism.

“Why is inflation so low across the developed world? Weak commodity prices is obviously a factor but core inflation is also low, primarily reflecting the lack of strong wage growth even in economies with low unemployment. That points to globalisation and excess supply in the world economy.”

The problem is on the demand side. The median demanders need the appropriate level of personal (nett) income to be full-time consumers. You shave the margins off that income – and – you got it! Funny that.

Solution: Roll out the robots! Wait. Robots are non-consumers: they do not consume stuff nor credit and produce no debt. Drat!

Big picture of the last 20 years is that demand was propped up by credit expansion . Salary growth was low to flat and compensated by cheaper credit . Asset bubbles gave an illusion of prosperity. Most profits flowed to the top. Now that model is broken. Profits as % gdp in the US now 13% which is unprecedented. Credit is maxed out.Growth is stuffed. Only way to increase the share of the top is to cannibalise the income of those below. This helps wealth accumulation but kills demand which means inflation falls , meaning assets are overvalued , threatening wealth accumulation. There is a hole in the bucket. The Trump thing on top shows the political impact.

@ Joseph Ryan.

Despite GDP having a weaker connection to the real economy than elsewhere doesn’t the debt/GDP ratio still matter to the real economy? The lower it goes the cheaper it becomes to roll over existing debt. If we can keep rolling over our c190billion at 1%, getting our current c3.5% down. That’s a few extra billion a year to spend setting up new utilities and before taking them apart again 🙂

My take is we’ll continue down this path until the next crisis, then helicopter money. Then inflation. Then trickle up economics again. Unless we get some brand new social democratic policy/reform like universal income.

Not sure the euro would survive helicopter money though. At least not in it’s current form. The Germans would surely opt out. Another 20% off the euro and helicopter money? That should inflate some of that debt away.

Let’s helicopter that money to the precariously employed or non equity holding or non Defined Benefit entitled section of society, those likely to spend it (instead of ‘invest’ it). i.e. Exclude everyone over 40.

@ Colm McCarthy

As Draghi’s ‘whatever it takes’ commitment worked wonders without the ECB having to do anything, he is unlikely now to set out what he would do. If it does come to that, it will not be a harbinger of good news!

@ grumpy

Yes Draghi may end up doing the equivalent of peeing against the wind because of factors beyond the control of the central bank.

The biggest surprise about the inflation in the early 1970s when Irish consumer prices rose by 54% in the period 1970-74 and then by 19% after the Arabs quadrupled oil prices, was that it had the impact of creating economic destabilisation in several countries for decades — Greece the star performer in 1950-1973, growing at more than 6% annually, France, Italy; the UK requiring an IMF bailout in 1976, and Ireland having the biggest budget deficit of a developed country in 1970-2008, were some of the shock reversals of fortunes.

China helped to reduce inflation with falls in prices of manufactured goods and clothes. By the 1990s,real food prices in the West were as low as during the Great Depression.

China also triggered a commodity supercycle which had a huge impact on developing countries.

It will take many years for this to unwind — the reemergence of China in such a short time span has been a development that is unique during the Industrial Revolution.

We shouldn’t expect that the future will be just like the past.

I have often complained about the ECB not taking its inflation mandate seriously, and about its interpretation of the mandate being skewed by an influential German-led minority. However, as dragged-out crisis continues, I am becoming increasingly convinced that the problem is as much about overly high asset prices as about consumer price deflation or near-deflation. With aging societies reliant on private savings for retirement, and with returns on assets that average out as being very low by comparison with the historical norm of 5% per annum (Piketty), those that can save have to save, bidding up the price of assets to historically exceptional levels.

Many have argued that high asset prices drive economic activity through a wealth effect. I don’t believe that is any longer stably true. Of course a wealth effect can exist at micro level, but there is a countervailing effect under which the higher asset prices drive higher expenditure by workers on second-hand capital assets, including homes for themselves, homes for their adult children, and investment assets to fund retirement. High investment asset prices drive up the share of income required to be invested in order to achieve a comfortable retirement. High home prices drive up the share of income that goes into rent, even for those who cannot accumulate assets, suppressing their ability to spend on genuine consumption.

I agree with Colm that the ECB should reset its definition of price stability. I agree that the consumer price component should be symmetrical around 2%, or better around 3 or 4%. But I also think it should target asset price stability, and target a level significantly below where assets are priced now. I say that as someone with enough assets to be hurt by such a policy shift, but with an over-riding concern for the interests of my children and their contemporaries.

@ Grumpy
the left has imploded alright but QE ain’t working. I think the Trump thing is very interesting. It is a kickback against the system more than anything and may change the political dynamic as well as the debate. Also IDS resigning. He doesn’t agree with Gideon’s ridiculous fiscal tightening now monetary policy is useless. I also think Brexit is related to the general macro context and popular discontent with do nothing elites. Markets are far too blasé about all of this.

I’m bemused at this obsession with flogging the dead horse of monetary policy. Whether one agrees with Larry Summers or not we are in an era of secular stagnation:

But nobody appears able to explain why or, apart from some arm-waving about infrastructure investment and enhanced economic co-operation among the great powers, have an idea about what needs to be done. It is more likely that there is a fear of confronting the key reason for this stagnation and either a vow of silence has been taken by the “economic priesthood” or they waffle about things that might help to distract the masses.

There is no doubt that globalisation and technological changes are contributing to the declining labour share of income and to the increasing inequality of economic outcomes in most advanced economies. But labour is a not a homogenous mass and the aristocrats of labour have much more in common with the capitalist managerial class and the professional service providers than they have with the rest of the labour force. (Irish Water provided a perfect example.)

And what they all have in common is rent-seeking. This is probably the single most important cause of the current secular stagnation in the advanced economies. More and more resource is being devoted and economic and political power exercised to capture rents and the capture is proportionate to the level in the pyramid. The 1% get more because they are the 1%. But they don’t spend as those further down the social and economic scale would. And they don’t invest – in the sense of financing productive investment.

However, any effort to tackle this rent-seeking would provoke the most vociferous opposition. So it’s safest to waffle about things that will have no impact.

Paul Hunt:

‘….it’s safest to waffle about things that will have no impact’.

Try this:

‘Negative interest rates are an effective tool for central banks in the fight against deflationary pressures although they have their limits, ECB governing council member Francois Villeroy de Galhau has said.

Despite deflationary pressures stemming from low oil prices and a slowdown in emerging market economies, Mr Villeroy said there was no sign of “deflationary dynamics” emerging where falling prices weigh on wages and asset prices.

Though much attention has focused on the ECB’s use of negative interest rates, Mr Villeroy stressed that they were one tool among others in a comprehensive package expanded at the governing council’s last meeting earlier this month.

“We think that they have been effective, but they naturally have their limits,” Mr Villeroy told a conference at the Bank of France, where he is also governor.

He added that the ECB’s governing council had given a strong signal of its “internationally cooperative attitude” by opting this month against a tiering system that would have exempted banks from negative interest rates.’

CB memes of the month :
-there are no signs of deflation
-we have the tools
-we will use them
-look at the birdie


Sure it is rent seeking but monetarism is key cos it is the operating system.Osborne is a sado monetarist cos monetarism says fiscal is pointless.

That the ECB has a central role can hardly be called into question. But is true that the present political impasse in Ireland seems to be generating very little in the way of economic, as opposed to, largely parish pump, political commentary.

Indeed, the decisive element of the situation is how all paid from the public purse are lining up at the pump, the education sector not being excluded.

An item from Bloomberg in today’s IT gives the background with which the ECB is attempting to cope. Only three EU countries – Sweden, Estonia and Germany – have avoided excessive deficits. The first is clearly the one to follow, given reasonably comparable economic circumstances.

Page 8.

“The move to top-down budgeting changed the sequence of the parliamentary
process. Parliament would from now on vote first on budget totals before deciding individual appropriations. The first step was for a Spring Fiscal Policy Bill to propose aggregate expenditure ceilings for the upcoming budget plus two further years, as well as indicative ceilings or ‘frames’ for the allocations across the twenty-seven expenditure areas. This bill was tabled for the first time in April 1996, preceding the presentation of the draft budget by five months. The Finance Committee received responsibility for scrutiny of the Spring Fiscal Policy Bill. Following parliamentary approval of the bill in June the executive would proceed to finalize a draft budget to be presented to Parliament in September, more than three months before the beginning of the new fiscal year. In short, the reforms changed the parliamentary voting order by requiring an aggregate decision prior to allocational choices.”

The “establishment”, broadly defined, can continue faffing around but the only exit, short of an election, is to give real substance to the content of what is now called the European Semester and agree a detailed outline budget for the next three years.

What we have instead is a proposal for a “minister for this” and a “minister for that”. The Swedes have 27 set expenditure areas for which individual cabinet members are responsible, with about 500 budget lines. Buying support from individual interests with the taxpayers’ money is the only description that is apt for Ireland.


I’m not suggesting these “unconventional” measures will not have an impact; they will, but I don’t think anyone knows precisely what impact they’ll have. What I am contending is that these measures won’t have an impact in terms of solving the problem they’re supposed to be aimed at. When the top income percentiles (comprising the principal business, economic and policy decision-makers) are primarily focused on rent-seeking, pushing monetary policy further out in to uncharted waters doesn’t seem very clever.

Fiscal policy has lost much of its traction because it’s being deployed to a great extent to re-distribute income to compensate for the impact of the rent-seeking. And the rent-seekers have become more and more adept at minimising their taxation contribution – even if the worm is turning a little. Not to mention the perverse determination of some governments to refuse to differentiate between current and capital expenditure when deciding the policy on fiscal deficits and surpluses.

Competition policy and economic regulation, the areas where statutory powers exist to rein in this endemic and avaricious rent-seeking, are rapidly becoming a sick joke being played on the vast majority of citizens. And more and more citizens are beginning to recognise this.

The mainstream political parties are not addressing the reasons for the growing disgust and anger of so many citizens and their support is evaporating. And what’s filling the emerging gap is not pretty. So, in this context, subcontracting the policy response to ongoing economic stagnation to unelected monetary officials and requiring these officials to contemplate ever more outlandish policies seems the height of folly.

Could we have a discussion about the meltdown of the GOP and what it is likely to mean for the US economy? Who gives a pschitt about Irish water?


The neo-kons and the corporates/wall st. control the GOP …. these do not trust Trump .. especially on foreign ‘regime change’ [Ukraine, Iraq, Hibernia, Libya, Syria, etc] policy ….

So the neokons will support Ms. Clinton – who appointed Victoria ‘F*k the EU’ Nuland (other half of arch-neokon W. Kagan) who organised the Feb22 coup on Ukraine – William Kristol has admitted (with slightly clenched teeth) as much ….

Locally the EU ‘deal’ with a very dodgy dodgy Turkish Admin [Ataturk mus be turning in his grave] is a disgrace and shows how its geopolitical slide continues ….

The ECB’s Chief Economist on the general topic.

“The real question is ‘what drives prosperity?’ I think prosperity is linked to education, productivity, the rule of law, property rights and all these things, certainly not monetary policy. In Italy productivity really started to stop growing in the early 1990s. I think this is a fundamental reflection for the country. Some key questions like the efficiency of the judicial system, the labour market reforms, liberalizations in services, have in all or in part been tackled.”

“Instead of raising taxes, spending could have been cut, and instead of cutting investment in infrastructure, government consumption growth could have been reduced. And particularly in the current juncture, investment should not be penalized but encouraged in countries like Italy.”

[Insert country as appropriate].

These are the questions that matter.

THank you, Colm. That’s far too subtle for me. I just don’t see any point in baiting these functionaries. There are far bigger fish who deserve a serious frying.

DOCM: The current nine-year-old crisis was not caused by failures in the Italian judicial system, Cypriot banks with deposits from Russia, folks in Greece who will not pay their taxes, dodgy developers and banks in Ireland.

There is a failure in the common currency area to have any macroeconomic policy at all.

The Chief Economist at the ECB concludes (on Italy): ‘I think this is a fundamental reflection for the country’.

This gentleman is not the Professor of Moral Philosophy at Padua, he works for the only central bank in the Eurozone.

“Paper doesn’t blush, as clearly evidenced by the failure of the original Stability and Growth Pact.” declared Yves Mersch (ECB) in a 2013 speech.

Neither apparently does the ECB, at it own failure to achieve its inflation target. Still, it continues to beat the structural adjustment drum.

The left may have imploded in terms of economic argument, but the right having absconded with money, is definitely losing the dressing room. It is only a matter of time before politics catches up.


With respect, I think Ireland has balanced its budget far more quickly, far too disproportionately, and at far too big a societal cost, to have to concern herself with very biased EU rules, that very few other countries seem to give a hoot about.
In any case the rules themselves are utterly flawed, concentrating as they do on expenditure ceilings, whereas it is deficit rules that are most relevant. Every country should have the flexibility to meet it deficit target by adjusting both taxation and expenditure and not be hamstrung by myopic penny pinching expenditure buffs.

It is utter nonsense to suggest, as the EU rules do, that a country where government expenditure accounts for- lets say- 35% of GDP, to be bound hand and foot by expenditure rules, whereas other EU countries can happily continue to allocate -say 45% of GDP to expenditure, relying on extra taxation to do so.

@ Thats Legal

I take your point on the benefit on low interest rates, but there are clearly anomalies with the derivation of GDP and concerns with how the benefit of GDP increase are being distributed throughout the country and society.

I have no doubt that the CSO staff are excellent at their work, but it is hardly their job to disentangle the Swiss cheese of loopholes in the international tax codes, and to translate them into meaningful economic data for this country!

@ CMmC

Absolutely right! But the incapacity of some countries to get out of it – the nine-year-old crisis, that is – IS attributable to these failures.

There is no European fairy godmother, either in the ECB or elsewhere. The euro is simply a common currency and the only job of the ECB is to keep it more or less stable, a job in which it has been reasonably successful. Various bells and whistles have been added but participating countries remain, more or less, on their own. This is a reflection of both the heterogeneity of the EU and political realism.

There is nothing on the political horizon here at the moment that would suggest that this particular penny has dropped. Or in France, for that matter, by way of recent example, in the speech by Villeroy. (One assumes that he is currently travelling by train).

There was an error, incidentally, in my list of countries not to have become involved in an excessive deficit procedure. Germany should not have been included. But Luxembourg, yes.

@ CMcC

On a point of more than detail; “the only central bank in the Eurozone”?

CHAPTER 2 Monetary Policy TFEU

Article 127

1. The primary objective of the European System of Central
banks (hereinafter referred to as the “ESCB”) shall be to
maintain price stability. Without prejudice to the objective of price stability,
the ESCB shall support the general economic policies
in the Union with a view to contributing to the achievement
of the objectives of the Union as laid down in Article
3 OF THE Treaty on European Union. The ESCB shall
act in accordance with the principle of an open market
economy with free competition, favouring an efficient allocation
of resources, and in compliance with the principles
set out in Article 119.

Article 129

1. The European System of Central Banks, hereinafter
referred to as ‘ESCB’, shall be governed by the decision-making
bodies of the European Central Bank, which shall be the Governing Council and the Executive

What would an appropriate macroeconomic policy for the EZ look like, how would you get it past the smorgasbord of electorates, and which part of it would be the responsibility of the ECB?


‘It out FFed FF FFS.’ May I cite you on that one?

@Colm McCarthy

Apologies for lack of comment on this thread. I’ve, apparently, run out of superlatives for the ECB(undesbanke). Borrowing …

The ECB has ‘out FFed FF FFS’ in scr€wing the 99% €Z Citiz€nry. Time to put it down … well down!

It is difficult to get a man to understand something, when his salary depends upon his not understanding it. That’s what came to mind when reading the ECB chief on Italy…What really scares me is the thought of the next crisis.

One thing the EZ has going for it is that Asians do not consider the euro as a store of value. The yanks have a huge problem generating growth given the state of the dollar.

@ grumpy

It would almost certainly look like the sum of appropriate macro-economic policies at a national level, the most important elements of which would be (i) effective management of the public finances in a manner that promoted growth and (ii) structural reform i.e. reduction to the maximum extent of rent-seeking which, as PH never fails to point out, lies at the core of poor economic performance (and which is also a major element in preventing effective management of the public finances).

The ECB would do what it could do within the terms of its mandate. It never fails to point out that it cannot substitute itself for the action required of the member countries which are required only to “coordinate their economic policies within the Union” (Article 5.1 TFEU). With the Fiscal Treaty and the creation of the ESM, the euro countries have agreed to go further but the difference relative to non-euro countries seems marginal.

It is up to the political class in the individual countries to face up to its responsibilities, an egregious example of the failure of one such playing out before our very eyes on the hundredth anniversary of the Rising.

Why doesn’t the EZ have a macro policy? Is it because they left it on the kitchen table and went out in a rush and now it is too late to turn back? Or is it because they thoughtnobody would notice?

@ Colm McCarthy

A renowned seer was once known for the mantra “we are where we are” and the flaws in the euro system have been well aired.

The American system also has its flaws and when economic change alters the comparative advantage in a region in the age of globlaisation, it can be very difficult to rebalance.

While high paid manufacturing jobs were replaced with low-paid services job, this week I came across a recent paper by European-based economists who reported that despite the hype about the web and digital, in 2010, only 0.5% of the US labour force was employed in industries that did not exist in 2000.

Growth decelerated in several European countries before the launch of the euro in 1999; some countries had persistent problems with their public finances and the single currency was a continuation rather than a structural break in trade patterns with fixed rates likely to result in widening trade imbalances.

In 1979, West Germany’s exports of manufactured goods were double France’s level. In 1988, 44% of the British trade deficit was with West Germany. In 1981/82, 40% of the deteriorating French trade balance was related to West Germany.

In 2014 The top 3 countries accounted for two-thirds of Euro Area GDP: in 2014 Germany accounted for 28.7% of GDP; France 20.7% and Italy 15.8%.

Italy is important.

In its 155 years as a unified country, Italy has had a debt-to-GDP ratio below 60% in less than 30 of those years. The debt fell as a ratio of GDP close to 20% at the end of the war in 1945 thanks to inflation.

Some of the countries have had double-digit youth unemployment rates for decades.

Both Greece and Italy have had poor inward foreign investment records for decades.

The Mezzogiorno’s (Southern Italy) employment rate (15-64 year olds) was at 41.9% in 2014 — the lowest of any region in the European Union.

The Mezzogiorno accounts for 36% of Italy’s population; about 23% of national GDP and 11% of exports; almost 62% of the population in the Mezzogiorno earned less than €12,000 in 2014 compared with 28.5% of the workforce in the Centre/Northern regions; the region has the lowest birth rate since 1862.

People don’t want diktats from Brussels and Frankfurt but we know well in Ireland that it’s always the easiest option to blame foreigners.

There is blame to go around but some of the same people who don’t wish to share the burden of war refugees rattle the tin ponny in Brussels for cash.

It would be naive to believe that outsiders could for example teach political arithmetic to Italy or induce change via cash gifts, if its elites and voters lack interest. Italy grew at an annual real average of 5% in 1950-1973 and IMF data show that in the 1980s, average annual GDP growth was 2.1%; it dropped to 1.4% in the 1990s, 0.6% in the first decade of this century and has averaged -0.5% since 2010.

If it had kept the lira it would have likely muddled through the recession better but devaluations in themselves doe not make countries rich.

I think people need to consider whether setting interest rates at zero per cent or lower might actually be suppressing inflation and investment rather than promoting same.

If money is paying interest while on deposit then I know that my money will devalue if not invested or pledged for a longer term. I know that products will increase in price if I don’t buy them now. Why would I spend or invest a euro when I know it will keep or increase its value if I don’t spend it?

Also, there is a danger that banks can survive just by screwing retail customers while rates are so low

My instinct (which of itself is no great guide) is that you cannot achieve inflation or increased investment while central banks are paying negative yields.

I think the possible positive effects of an increase in interest rates need to be looked at.

I also think that offering a rate which is linked to what banks are charging retail customers might be an idea to be considered by those who know more about these things, e.g. the banks should be charged a rate relative and proportionate to what the banks are charging customers and the volumes of lending in different sectors to balance:
a) the banks need for profit, and
b) the need to stimulate the wider economy.

@ Zhou
neg rates are a consequence of all the debt which is 40% higher than in 07 and it
is debt that is driving deflation, not neg rates

The Governor of the Banque de France; again.

The OECD lectures Poland.

The unavoidable conclusion is that the political impetus for change, either in the right or the wrong direction, has to come from within the individual sovereign countries.

The current status of the political discussion in Ireland resembles Lanigan’s Ball, with the only two participants that can make up a set refusing to line out together.

Three long weeks I spent up in Dublin,
Three long weeks to learn nothing at all,
Three long weeks I spent up in Dublin,
Learning new steps for Lanigan’s Ball.


The ECB is paying banks to lend money. Therefore there is no incentive for banks to rid themselves of limping debts. If it were costing the banks to leave poorly performing loans in place then they would be more driven to eliminate those debts by foreclosure and write off or otherwise. Therefore, you have lots of zombie borrowers and zombie asset owners locked in purgatory without any clear path to exit.

@ Zhou
The ECB has been kicking the can down the road for ages. There is too much mispriced debt for it to have an open and frank discussion with anyone. The system is so complex and there are counterparties all over the place. Prime Time did a programme a while ago about a contractor in Meath who couldn’t pay his debts and hw many people down the food chain were hit. It was really eye opening.
I was at a conference in 2005 where some suit told us that banks were making RoEs of 20% . Turns out it was creating crap. 8 years later it is still clogging up the system.
RBS has lost GBP 50bn since Lehman and it isn’t done yet.

Brendan Keenan on the topic.

To quote the DOF in a MTBF documentation footnote;

“The structural balance is the budgetary position that would prevail if the economy was operating at its full capacity. For the purposes of the SGP, a production function approach that is harmonised across Member States
is used to assess the productive capacity of the economy. Deviations of actual demand from full capacity (the output gap) are an estimate of the economy’s cyclical position; the cyclical budgetary component is determined from this output gap together with estimates of the sensitivity of revenue and spending to the economy’s cycle. It is important to emphasize that this one-size-fits-all methodology can – especially for small, open economies undergoing rapid changes – lead to real-time estimates of the structural balance that are sometimes counterintuitive.
In Ireland’s case, this means that the results need to be interpreted with caution.”

I wonder what full capacity means in the context of 99% wage stagnation and 1% enrichment

Inflation targeting loses all credibility if there is no explicit target. Its not inflation targeting if no explicit target is set with credible measures to achieve this target. I don’t think it can be said the eurozone is perusing an inflation target at all as one of the most important parts of an inflation targeting policy is to gain the benefits of fixed inflation expectations that come from having an explicit target.

Jean Pisani-Ferry on helicopter money.

Setting up two options, neither of which is palatable to Berlin, is an exercise unlikely to lead to any change in the German position. “Structural reform”, coupled with “budgetary consolidation” aka “austerity”, remains the only game in town as far as the Germans are concerned. Given recent developments in Ireland, the supposed star pupil, who can blame them?

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