The ECB’s lack of credibility could hamstring Europe’s recovery

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Hardly anyone believes the European Central Bank is serious about hitting its inflation target of 'below, but close to, 2%'

the past decade the European Central Bank was the only institution standing between the euro zone and financial oblivion. Europe’s problem was budgetary inhibition and insufficient risk-sharing. Monetary policymakers were the only game in town. No longer. Earlier this year the European Union agreed to issue joint debt to fund a fiscal response to the pandemic, sending confidence in the currency union surging. Now the most pressing problem in euro-zone economic policy stems from Frankfurt.

A central bank that took its target seriously would fight tooth and nail to improve this outlook. Depressed inflation expectations are a dangerous malady. They keep real interest rates—that is, rates minus expected inflation—higher than they otherwise would be. This is a problem when, as today, nominal rates cannot fall much further. And central banking is a confidence game: the more a target loses credibility, the harder it is to hit.

Some would have it that the problem remains fiscal. Europe’s budgetary stimulus is smaller than America’s, and thehas already played an enormous role in markets this year. But the view that looser purse strings are needed to “ease the burden” on monetary policy is dangerous. If the practical effect of budgetary loosening is to let the central bank take a breather, the chances are that the exchange rate will appreciate, offsetting some or all of the stimulus.

There is nothing inherently wrong with a strong euro. Many models, including our Big Mac index, suggest that it is warranted. But at present it partly reflects a suspicion that theis willing to live with a lower rate of inflation than its official target demands. That risks damaging both the central bank’s credibility and also the euro zone’s recovery.


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The EU is toothless . To get innovation like the one you find in US and China. EU should build a state of the art University. And Hire the best professors posible. The fragmentet EU is a failure the way it is to day. And all member state should take part finance a University.

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