sinn87_GettyImages_catchingrainingeuros Getty Images

The End of ECB Restraint

Outgoing European Central Bank President Mario Draghi has indicated that the bank is planning a new round of aggressive monetary stimulus. Such measures will most likely have negative economic consequences – not least by further increasing the cost pressures weighing down German industry.

MUNICH – Expectations – and, for many economists, rather bad ones – have been confirmed: the European Central Bank has decided to inflate the eurozone. Following the ECB’s latest policy meeting on July 25, outgoing President Mario Draghi made it clear that the bank’s seemingly harmless inflation target of 1.9% will in fact be the basis for a new phase of expansionary monetary policy over the next few years. This will go well beyond the ECB’s stimulus measures to date, and is likely to pose further risks to the European economy.

We should remember that the Maastricht Treaty assigned the ECB the single, non-negotiable goal of maintaining stable prices, which, if taken literally, would mean an inflation rate of zero. This is very different from the mandate given to other central banks. The introduction of the euro, however, caused interest rates in southern Europe to fall, leading to an inflationary bubble that raised annual price growth to well over 2% in some countries. The ECB’s Governing Council then argued that the goal of price stability could not be achieved exactly, and also pointed to several measurement errors that complicate policymaking. So, the authorities said, they would tolerate average inflation of up to 2% for the eurozone as a whole.

The Governing Council did not fancy a restrictive monetary policy aimed at reducing inflation, as it gave only little weight to the risk of reducing competitiveness in some countries and did not want to slow down countries in stagnation such as Germany.

https://prosyn.org/LigT9sx