Rhein on Energy and Climate

Europe is enjoying a level of price stability and low interest rates rarely seen since the end of World War II.

Wages, pensions, rents etc. do not require permanent adjustments to rising prices, an advantage we are not fully appreciating.

Citizens are no longer deceived by monetary illusions. The Euro has lost very little of its value during the past 10 years. Citizens can therefore keep their savings in liquidity without being afraid of a hidden depreciation, while house owners should no longer be deceived by inflationary rises in value.

The only ones not content with price stability are those who benefit from inflation, like heavily indebted governments and companies which see the relative weight of their debt shrink when prices rise, though they too benefit from price stability because of the low interest rates that go along with.

So why are the ECB and most monetary economists so afraid of low inflation? Why does the ECB keep reminding us of its medium-term inflation target below but close to 2%?

The answers are simple though not fully convincing:

  • Price stability might turn into deflation and lead to economic stagnation.
  • A moderate inflation may facilitate the consolidation of excessive public debt.
  • Investment may be more stimulated by expectations of inflation than of deflation.

There is no serious reason to fear deflation in Europe or in the world.

  • The prices of energy and other basic materials are bound to rise under the impact of growing scarcities, rising populations and demand.
  • In Europe wages are coming under upward pressure due to ageing population and increasing shortages of qualified labour.

Economic growth will remain weak in Europe for two basic reasons:

  • The labour force is stagnating;
  • It will become more and more difficult to raise productivity by more than 1% per year.

The meagre 1.7% economic growth projected for 2015 is in line with what will be ahead of us in the future. Considering our exceptional level of prosperity we should be more than happy with annual economic growth of 1% to 2% and focus our efforts on

  • absorbing the unacceptably high numbers of young unemployed by better training and schooling;
  • reducing regional income disparities;
  • making Europe fitter for global competition.

Eberhard Rhein, Brussels, 10/7/2014

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