Europe’s 4% Solution

The eurozone’s 2% annual inflation target is not a magic number, and it is irrational to let it determine the overall macroeconomic framework. There are times when 3-4% is better than 2%, and Europe is at such a moment.

WASHINGTON, DC – This is a momentous summer for Europe, because both the eurozone and the European Union could be in danger of unraveling, despite the important steps toward a banking union and direct recapitalization of Spanish banks taken at the June meeting of eurozone leaders. Implementation of the proposed reforms is lagging; there may be legal challenges to the European Stability Mechanism in Germany; and the Netherlands and Finland seem to be backtracking on some parts of the agreement.

Even in a worst-case scenario, some degree of intra-European cooperation will surely survive. But it is hard to see how the EU as we know it could survive even a partial disintegration of the eurozone.

Those who argue that one or more countries on the eurozone’s periphery should take a “holiday” from the euro underestimate both the economic and political repercussions of such a move. The sense of failure, loss of trust, and the damage inflicted on so many if two or three countries had to leave would shake the entire Union.

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