Price stability is the primary objective of the ECB, as laid down in the Treaty on the Functioning of
the European Union, Article 127 (1). The ECB gets to choose how to interpret
price stability, and it does this as “inflation rates below, but close to, 2%
over the medium term.” Why ‘below but close to’? If this means 1.8% or 1.9%, it
would seem very odd. How do the ECB know that 1.8% inflation is the right
target?
I suspect the answer is that this formulation is a compromise,
between those who wanted a commitment to inflation below 2% (which could mean
zero) and those that wanted just 2%. Is this constructive ambiguity? I cannot
see how it can be. The whole point about inflation targeting is to provide a
clear signal about the objectives of the monetary authority.
Now this would not matter much if everyone involved in ECB
monetary policy was of one mind. However they clearly are not. Here is Jürgen Stark, who was sometimes
referred to as chief economist of the ECB until he left at the end of 2011,
talking about the current conjuncture:
“The current inflation rate of 0.3% is due to the significant decline in commodity prices and the painful but unavoidable adjustment of costs and prices in the peripheral countries. Only Greece currently has a slightly negative inflation rate. In other words, price stability reigns in the eurozone. This strengthens purchasing power and ultimately private consumption. The ECB has fulfilled its mandate for the present and the foreseeable future. There is no need for policy action in the short term.”
Are these views of the past? Or do some who continue to sit on
the Governing Council still have sympathy for these views? Is this about
principle, or national interest: ECB rates were cut substantially when the German economy
was weak in 2002-5, rather than let inflation fall below 2%. Speculation of
this kind is fine for those who make money from it, but inflation targets
should be clear and unambiguous. Allowing people to believe that maybe the ECB
is not too bothered about below 2% inflation could be very dangerous because of the zero lower bound.
The solution to this problem seems terribly straightforward.
All the academic discussion is about whether inflation targets should be higher
than 2%, not lower, because the chances of hitting the zero lower bound are
clearly greater than had been thought. With Stark and others no longer there, perhaps the ECB can agree (by majority vote if necessary) to target just
2%, and those that cannot abide by that decision can leave - as Stark officially did - for 'personal reasons'. If the ECB cannot do this by themselves, then Eurozone governments should tell them to do this. I have never
understood why the inflation target itself should be something that is decided
behind the closed doors of central banks.
One final thought on the Stark article. He too uses the phrase “Anglo-Saxon economists”.
I am at a loss to know what this is meant to signify. For a few who comment on
my posts it means that we are part of a plot to ensure the Eurozone fails, but
is this what Stark means? Perhaps there is some reason why the theories of
economics developed in the UK and US do not apply in the Eurozone. However the
work I have seen done by ECB economists would not look out of place if done at
the Fed or IMF, and from his experience Stark must know this. Some people refer
to ordoliberalism. But if ordoliberalism differs from Anglo-Saxon neoliberalism
in theory rather than practice, it seems to me this is because it takes more
rather than less notice of mainstream economics. If it means disagreeing with
almost everything in the paragraph of his quoted above, then I think many
non-Anglo-Saxon economists would be in that group. Perhaps, like the phrase ‘below but close to 2%’, we will never know quite what it means.
