The Eurozone’s 2% Fixation

BRUSSELS – Economic policy discussions in Europe used to be dominated by the number three, namely the 3%-of-GDP upper limit on national fiscal deficits. Although the fiscal rules enshrined in the Maastricht Treaty were in fact much more complex, public debate tended to focus on the 3% figure, especially when deficits ballooned during the euro crisis nearly a decade ago.

Today, however, the number two holds sway over economic policymakers, in the form of the European Central Bank’s 2% inflation target. Although the Treaty on the Functioning of the European Union does not define price stability, the ECB, whose sole official task is to ensure price stability in the eurozone, itself decided some years ago that it means inflation “below, but close to, 2%” over the medium term.

The ECB regards this goal as sacrosanct. But it has not been able to achieve its target in a long time. That hardly makes it unique: inflation has remained stubbornly below 2% in most advanced economies for almost a decade. Moreover, the persistence of below-target inflation does not seem to have had adverse economic consequences. Eurozone employment has been steadily increasing, and unemployment has fallen to record lows. But the ECB fears that its credibility is at stake, and regards abandoning its inflation target as out of the question.