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The ECB and Its Critics

The European Central Bank’s decision to embark on quantitative easing has triggered an avalanche of indictments, largely reflecting northern European (and especially German) concerns. Though the main charges against QE are unfounded, they must be confronted head-on, lest they undermine the ECB’s credibility and effectiveness.

PARIS – In Northern Europe, especially Germany, the European Central Bank’s decision to embark on quantitative easing (QE) has triggered an avalanche of indictments. Many are unfounded or even baseless. Some are confusing. Others give greater weight to speculative dangers than to actual ones. And few point to real problems, while ignoring potential solutions.

Judging by the criticism, one might consider zero inflation a blessing. But if that were true, central banks around the world would have set it as a target long ago. Instead, all of them define price stability as low, stable, but positive inflation.

That is because zero inflation has three overwhelmingly negative consequences. First, it erodes the effectiveness of standard monetary policy (because if interest rates went much below zero, depositors would withdraw cash from banks and put it in safes). Second, it makes relative wages (of, say, manufacturing versus services employees) more rigid, because wage contracts are generally set in euro terms. And, third, it increases the burden of past debts and makes exiting from a private or public debt crisis even more painful.

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