Is overzealous adherence to "inflation targeting" ruining European economies?

[Beet]

Forget labor market regulations. Something far more basic-- the EU's monetary policy, is being handled out of kilter. Perhaps the real blame with Europe's slow economy lies with the ECB-

(from the Economist online):
IN MANY ways, the OECD's twice-yearly Economic Outlook, published on May 24th, is entirely predictable. The OECD worries loudly about America's current-account deficit—on course, it thinks, for $900 billion next year—and offers the usual list of antidotes: more saving in America, faster demand growth in Europe and Japan. Less predictably, given the normally guarded tone of such official reports, it takes aim at the unwillingness of the European Central Bank (ECB) to cut the euro area's short-term interest rates.

In so doing, the OECD highlights an important transatlantic curiosity. In the euro area, the ECB has kept short-term interest rates constant, despite ever gloomier economic news. Long-term rates, though, are responding to the misery. In America, where the Federal Reserve has been increasing short-term rates amid economic strength and signs of inflation, long-term rates have stubbornly refused to climb (see chart).

Like every other forecaster, the OECD has slashed its growth projection for the euro area, to a mere 1.2% this year. This conceals wide variations: France and Spain look fairly resilient, Germany and (especially) Italy ever sicklier. The zone's mediocre performance, the OECD says, is not just bad luck, “circumstantial arguments”—the Iraq war, oil and commodity price shocks and the stronger euro—being no excuse for a “string of aborted recoveries”. Although structural reforms, a favourite drum of the ECB, are part of the answer, stronger demand growth requires lower interest rates. Much lower, indeed: Jean-Philippe Cotis, the OECD's chief economist, spoke of the need to cut rates by half a percentage point “between now and the end of spring”.

The OECD's call was echoed the same day by the head of Ifo, a respected German research institute, who said that the ECB should put its “foot on it”. The central bank, however, is in no mood to heed such calls. Jean-Claude Trichet, its president, ruled out a rate cut at the ECB's most recent press conference on May 4th. He repeated the message to members of the European Parliament at the start of this week. The central bank's main concern is inflation, which has been hovering above the ECB's target of 2% or less. The bank also fears that lower short-term rates would do little to repair Europe's economic problems, because they would raise inflationary expectations and thus long-term interest rates.

All this seems overblown. As a special study in the OECD report makes clear, core inflation (for example, leaving out the relatively volatile prices of food and energy) in the euro zone is not only low, but on a downward trend. And Europe's long-term rates are at record lows.

Would they rise by much if monetary policy were loosened? Maybe not, if America is any guide. American conditions—a strong economy, gathering inflation and rising short rates—seem to favour higher long-term rates. Yet yields on ten-year Treasury bonds are not much more than 4%. Last June, when the Fed began tightening, they were 4.6%.

[opebo]

I think 'ruining' is far too strong a word, but yes, they certainly ought to loosen monetary policy a bit. 

[Beet]

I think 'ruining' is far too strong a word, but yes, they certainly ought to loosen monetary policy a bit. 

Why is ruining far too strong?

[minionofmidas]

Because it's not ruined, silly.

[Richard]

Because it's not ruined, silly.

You must then think of your lovely 12% unemployment and 0.5% growth as a great economy.


A recent BBC story says that about 56% of Germans want the Deutche Mark back.  I'm not surprised.  Germany could use much lower interest rates.  Italy needs a bit higher.

I'm enjoying sitting here watching the EU bank squash any economic growth in western Europe with their fear of inflation.

Crash and burn baby!

[minionofmidas]

Because it's not ruined, silly.

You must then think of your lovely 12% unemployment and 0.5% growth as a great economy.


A recent BBC story says that about 56% of Germans want the Deutche Mark back.  I'm not surprised.  Germany could use much lower interest rates.  Italy needs a bit higher.

I'm enjoying sitting here watching the EU bank squash any economic growth in western Europe with their fear of inflation.

Crash and burn baby!

No, I'm not saying I love it. I'm just saying that the idea it's somehow totally ruined or waay worse than elsewhere or anything is ridiculous.
And yes, I agree that these Central Bank policies tied up in international treaties were an error. One made to appease the "I want the Mark back" crowd. Although I gotta say, I haven't heard anybody seriously say that in over a year. I doubt that's a new poll.

[Richard]

http://news.bbc.co.uk/2/hi/business/4599681.stm

June 1, 2005

[opebo]

Lewis Trondheim is right, Richard R., Europe - even Germany - is not bad off.  They don't need much economic growth as they have a fairly static population.  Most people are very well provided far - the lower half of the population far better than the similar group in the US. 

Most critiquing of European economic conditions has a political bias, as does the boosting of American economic conditions.  In fact both have their good and bad sides, and it is certainly arguable that for the majority of people the European conditions are superior to the American.

[minionofmidas]

Read that BBC thing. Weird. It's not as if this supposed "storm" in Germany had been reported on here. It doesn't say it's a new poll btw, it says that's a poll quoted in the article they're referring to. Its probably years old.

[Richard]

Read that BBC thing. Weird. It's not as if this supposed "storm" in Germany had been reported on here. It doesn't say it's a new poll btw, it says that's a poll quoted in the article they're referring to. Its probably years old.

More proof BBC is fabricating things?

Do you enjoy the German economy?  Is everything going rosey, as Opebo is saying?

[Beet]

Because it's not ruined, silly.

Sorry, I didn't mean to imply it was already ruined at any rate. But to use the term colloquially, I think the majority of voters in France (a country with a growing economy), and the Netherlands, Germany, and Italy, all of which are in or slipping in and out of various degrees of recession, feel that the economic situation, especially the job situation, is unacceptable. If the ECB continues to conduct interest rate policy this way (which also drives up the value of the euro, making European exports needlessly expensive), it tends to have the effect of ruination over a long period of time. IMO, there needs to be a more open discussion over continent-wide monetary policy and its effects on individual countries.

[minionofmidas]

Because it's not ruined, silly.

Sorry, I didn't mean to imply it was already ruined at any rate. But to use the term colloquially, I think the majority of voters in France (a country with a growing economy), and the Netherlands, Germany, and Italy, all of which are in or slipping in and out of various degrees of recession, feel that the economic situation, especially the job situation, is unacceptable. If the ECB continues to conduct interest rate policy this way (which also drives up the value of the euro, making European exports needlessly expensive), it tends to have the effect of ruination over a long period of time. IMO, there needs to be a more open discussion over continent-wide monetary policy and its effects on individual countries.

Word.

[Richard]

Read that BBC thing. Weird. It's not as if this supposed "storm" in Germany had been reported on here. It doesn't say it's a new poll btw, it says that's a poll quoted in the article they're referring to. Its probably years old.

Oh really?

http://www.reuters.com/newsArticle.jhtml?type=worldNews&storyID=8690290

Minister says Italy should consider leaving euro

ROME (Reuters) - An Italian minister said on Friday the country should consider adopting its own currency again, adding fuel to recent talk of a possible break-up of the euro zone which EU leaders dismiss as "absurd."

Welfare Minister Roberto Maroni, from the euro-skeptical Northern League party, said Italy should hold a referendum on whether to revert to the lira currency it abandoned when 12 nations started to use euro notes and coins in 2002.

Analysts said Maroni's comments should be seen as populism typical of the Northern League. They do not represent the government as a whole and are not the harbinger of any dramatic political initiative.

The comments go beyond the usual anti-euro sentiment which increasingly laces the rhetoric of Prime Minister Silvio Berlusconi and other ministers as Italy buckles under economic recession and a burgeoning budget deficit.

The euro "has proved inadequate in the face of the economic slowdown, the loss of competitiveness and the job crisis," Maroni told the daily La Repubblica, later confirming his remarks to Reuters.

The answer is "to give control over the exchange rate back to the government," he said, adding that European Central Bank President Jean-Claude Trichet was responsible for the "disaster of the euro."

Analysts say outside the single currency Italy would have far higher interest rates and debt-servicing costs which would swell the budget deficit and possibly cause a financial crisis.

"Italy's recession is worsening ... we can expect more of this kind of declaration given the deterioration in the economy and the domestic political climate," said SocGen analysts in a research note.

Bank of America economist Lorenzo Codogno said that the temptation to blame the euro for domestic ills was not limited to Italy.

PRESSURE ON ECB

Reaction to France's referendum rejecting the European Constitution "may bring more populist policies which would push Europe even further away from the kind of supply-side reforms which are desperately needed to stimulate growth," he said.

"This populist trend could also result in more political pressure on the ECB to rely on lower interest rates to solve problems that should be more properly addressed by means of economic reforms."
German officials have avoided similar anti-euro rhetoric but have often called for more expansionary ECB policy.

Economy Minister Wolfgang Clement said on Thursday Germany was "paying a not inconsiderable economic price" because it had lost the advantage of relatively low real interest rates.

Talk of a possible break-up of monetary union has circulated in media articles in recent days -- fueled by France's referendum -- but the idea has always been dismissed by policy-makers.

Trichet described talk of the collapse of the euro as "absurd" in his monthly news conference on Thursday, likening the exit of a member state to California ditching the U.S. dollar.

ECB chief economist Otmar Issing said on Friday that an Italian exit from the single currency would be "economic suicide" while European Monetary Affairs Commissioner Joaquin Almunia repeated that the euro's future was not in doubt.

"Nobody is going to succeed in eliminating an achievement that cost us a lot to bring about and that is bringing us many advantages," Almunia said in a radio interview.

In Rome, neither the economy ministry nor the prime minister's office commented on Maroni's remarks, but reaction from senior coalition members showed the absence of any common line.

Marco Follini, leader of the Union of Christian Democrats, another government party, slammed Maroni's "bizarre idea which is against the national interest."

But Guido Crosetto, an economic spokesman for Berlusconi's Forza Italia (Go Italy) party, was far more indulgent:

"Maybe it would have been better not to join monetary union, but now it's too late ... the real problem of the euro is the shameful monetary policy of the ECB."

[minionofmidas]

Lega Nord. Case closed.

[True Federalist (진정한 연방 주의자)]

It is possible that the euro may end up suffering the fate of the Latin Monetary Union.

[Jens]

It is possible that the euro may end up suffering the fate of the Latin Monetary Union.

Really not the same thing. The Latin Monetary union and the Scandinavian monetary Union was based on interchangable curencies aka 1 Danish kroner = 1 Swedish = 1 Norwegian, but they still had independent national banks ect. The Euro is a total monetary union and is not likely to fold the same way as the old unions did (they didn't really fold, the countries just stopped having interchangable curencies)