Finance ministers should act with the ECB on low inflation
On Monday, euro area finance ministers will meet in Brussels. On Thursday, the ECB governing council will meet in Frankfurt. One issue will dominate of the agenda of both meetings: the euro area's low inflation rates. More forceful policy action is needed from both meetings to bring inflation rates back to 2% in the medium term.
On Monday, euro area finance ministers will meet in Brussels. On Thursday, the ECB governing council will meet in Frankfurt. One issue will dominate of the agenda of both meetings: the euro area’s low inflation rates. More forceful policy action is needed from both meetings to bring inflation rates back to 2% in the medium term.
In the latest Eurostat flash estimate, inflation rates remain firmly below 1% at a value of 0.7%. While Eurostat reports a slight increase in core inflation rates for April 2014, inflation and core inflation have now been well off the ECB’s operational goal of close to but below 2% for over 6 months. Even more worrying, inflation expectations measures show inflation will not return to the 2% target in the next two years. Such low inflation rates are harmful for the euro area’s citizens, businesses and governments. They increase the real burden of debt, make price and wage adjustment between different countries and sectors more difficult and they reduce the opportunities for new business.
The ECB has a number of tools to fight inflation at its disposal and should make use of them (as I argued in February “The ECB should be more aggressive”). Together with three colleagues, we will publish a paper next week proposing an action plan for the ECB. Beyond lowering the main lending rate to zero and the deposit rate to negative territory, the ECB should start an asset purchase programme.
However, monetary policy should be accompanied by more structural policy measures and appropriate fiscal policies from the member states. It is therefore good for EU finance ministers to also discuss the topic, a discussion that should be focused on what can be done.
- The ongoing clean-up of the banking system undermines monetary policy transmission and bank lending. It is the duty of finance ministries and resolution authorities to force banks to raise the capital needed and restructure where necessary. Only a healthy banking system can ensure that bank credit starts growing again and inflation rates pick up.
- The euro area is undergoing a major price adjustment process between the core and the periphery. To ensure that inflation moves in parallel in the core and in the periphery, an increase in public investment in the euro area and further service sector reforms in Germany would help. A reform of the German tax system to reduce the tax burden on households would also be highly beneficial in boosting demand and increasing core inflation rates.
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