The ECB and Its Critics

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.

But, say the critics, there is no reason to worry, because the eurozone’s near-zero inflation is merely the result of the sharp drop in oil prices. Unfortunately, there is indeed plenty of reason to worry. Consumer price inflation in the eurozone has been below target for 22 consecutive months – long before the price of oil started collapsing. Cheaper oil is a boon for growth; but it also lowers long-term inflation expectations, which are the true target of monetary policy.