“The credibility of the ECB would be better if it revised its course”

2023-07-13 09:00:12
Headquarters of the European Central Bank in Frankfurt am Main (Germany), July 4, 2023. IMAGEBROKER.COM / SIPA

By definition, economists love numbers. They handle them all day and maintain an almost fetishistic relationship with them, especially since their discipline has become a haunt of mathematicians. The number of the day is 2. Two percent is the inflation rate targeted by central banks, and particularly the European one, the ECB. It is for her the symbol of financial stability.

Read also: Inflation slows in Europe, but remains a concern

Below, the risk of recessionary deflation threatens, above, inflation gallops and eats away at savings and purchasing power. This threshold was decided with a wet finger by noting that it was the level of the most virtuous economies in terms of public finances, in this case Germany and the countries of the North at the time of the creation of the euro.

The sudden explosion of inflation, following the end of the health crisis and the entry into the war in Ukraine, upset the balance. To combat a rise in prices which approached 10%, in Europe as in the United States, the ECB, in the wake of the American Fed, raised its rates in order to cool the economy. With a year’s delay, the transmission time of this decision in the real economy, inflation is falling. It is close to 5% and everything indicates that it might reach 4% by the end of the year. Proudly, the ECB recalls that it will fight the evil genius with its rate weapon until it returns to its bottle of 2%.

Controversies

This is where, suddenly, a new controversy emerges. Renowned economists are stepping up to challenge this obsession. Olivier Blanchard, former IMF Chief Economist and author, with former Fed Chairman Ben Bernanke, of a much-commented article on inflation, explains that there would be danger in insisting on raising interest rates to return to this level and that the central banks should be satisfied with a target of 3%.

With a shocking argument. If we remove variations in energy and food prices from the calculation of inflation, what remains, “core inflation”, stabilizes around 4%. This is the result of shortages on the labor market which are pushing wages up, but also of new inflationary forces, such as the energy transition or industrial relocations. This inflation is more durable, sticky, say the Anglo-Saxons.

To fight it, it will be necessary to raise interest rates to levels that create recession and mass unemployment, at the risk of plunging the European economies into serious instability. For the economist Patrick Artus, if the ECB remains anchored on its objective of bringing inflation down to 2%, we risk killing the energy transition and causing a political cataclysm by plunging the most indebted countries, including France, into a serious political crisis.

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