The only centralised macroeconomic policy target in the Eurozone is the ECB’s 2% inflation number. Today’s flash estimate from Eurostat shows a price decline of 0.2% over twelve months. The index for the Eurozone has in fact been flat now for eighteen months – today’s number of 117.70 compares to 117.61 in June 2013.
The undershoot would be a concern in a proper monetary union operating at the ZLB: real rates are too high. In the Eurozone, which is not a proper monetary union, just a common currency area with heavily indebted states, it creates two additional problems.
The real burden of debt is not eroding at the advertised rate. If the ECB had delivered a 2% rate since December 2008, at which point debt build-up in the periphery was already manifest, the index today would be 121.6 rather than 117.7. If the ECB fails to get the rate of inflation up to 2% for another couple of years as QE-pessimists fear, the failure to hit the inflation target could add 5% or 6% to real debt burdens of sovereigns which have already had to resort to official lenders.
The second problem is the absence of any other centralised macro policy instrument, if you discount, as you should, Jean Claude Juncker’s leverage wheeze. The instrument that has fallen short is the only one available.
The inflation target should now be Olivier Blanchard’s 4% rather than the ECB’s 2%, if only to make up lost ground. If you believe that the ECB cannot or will not deliver on the inflation rate, the alternative is illegal: a fiscal expansion financed by the central bank, the kind of thing they do in real monetary unions.