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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 o

Publishing date
06 May 2014

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.

About the authors

  • Guntram B. Wolff

    Guntram Wolff is the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). From 2012-16, he was a member of the French prime minister's Conseil d'Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

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