Rhein on Energy and Climate

On Friday (21 November) Mario Draghi, the ECB President, has provoked fireworks at EU stock exchanges after promising he would do all in his power to push inflation in the Euro – zone up to 2%, the ceiling considered as the “target” for EU and US central banks.

Expectations of rising prices may give a push to investments, as they raise nominal profitability. But those having invested in savings accounts or bonds will have to pay for it by a depreciation of their assets.

If that is the price for reducing high unemployment it might be acceptable.

But is the ECB really capable of inducing more private and public investment?

After all, it can only do more of the same, i.e. inject liquidity into the market by buying private or even public bonds or mortgages.

Mario Draghi`s announcement raises, however, two more systemic questions:

Can modern economies ensure high employment only at the price of moderate inflation?

Why are economists so scared about the risks of deflation, though it has been an extremely rare and temporary phenomenon in the last 50 years? Why is the present 0.4% inflation rate in the Euro-zone a risk for the economy?

EU inflation rates reflect very different national trends, from Greece and Bulgaria with prices having fallen by 1.8 and 1.3% respectively in October 2014 and Romania, Austria and Finland registering price rises between 1.8 and 1.2 per cent.

Present inflation rates are substantially lower than the 2.2% average during 1991-2014, during which the Euro-Area registered a moderate average GDP growth of 1.5%. During these two decades a deflationary sign has appeared only once, in July 2009, in the early phase of the EU recession. Is the deflationary nightmare not exaggerated ?

We should appreciate the present price stability even if it goes along with excessive unemployment. It removes illusions about income and wealth and certain costs caused by necessary inflationary adaptations:

Changing millions of prices become as unnecessary as wage indexing.

Wage negotiations can fully focus on productivity rises.

Will Europe ever again witness growth rates of more than 2%? Where should that growth come from beyond reintegrating millions of unemployed into the labour market, rising productivity and retirement age? Has an injection of liquidity the slightest impact on these three variables?

Eberhard Rhein, Brussels, 21/11/2014

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