Well, there's a joke in there somewhere about old grudges, asceticism, outrage and paying the bill. The reality, however, is that it will require a subversion of stereotypes to save the Eurozone, and potentially the EU.
The most pressing, and perhaps the biggest challenge, is for the ECB to target a higher lever of inflation. Actually, it would be great if they aimed at their current target. The insistence in using CPI rather than the GDP deflator means that monetary policy has failed because it is too tight. The GDP inflator is not used because it excludes import prices, and obviously commodity price inflation wouldn't be accounted for. However, the panic tightening by the ECB in April 2011 shows the potentially ruinous effects of responding to what might be a temporary blip in import prices.
The fear of inflation seems culturally manifested in the ECB; and a change to using the GDP deflator, which also excludes non-monetary factors like indirect taxes, would involve a significant easing in monetary policy. If this miracle were to occur in conjunction with a marked effort to increase German aggregate demand, we might have the makings of a European recovery. Here is a chart from the Market Monetarist that nicely shows the divergence when CPI is favoured over the GDP deflator:
The most pressing, and perhaps the biggest challenge, is for the ECB to target a higher lever of inflation. Actually, it would be great if they aimed at their current target. The insistence in using CPI rather than the GDP deflator means that monetary policy has failed because it is too tight. The GDP inflator is not used because it excludes import prices, and obviously commodity price inflation wouldn't be accounted for. However, the panic tightening by the ECB in April 2011 shows the potentially ruinous effects of responding to what might be a temporary blip in import prices.
The fear of inflation seems culturally manifested in the ECB; and a change to using the GDP deflator, which also excludes non-monetary factors like indirect taxes, would involve a significant easing in monetary policy. If this miracle were to occur in conjunction with a marked effort to increase German aggregate demand, we might have the makings of a European recovery. Here is a chart from the Market Monetarist that nicely shows the divergence when CPI is favoured over the GDP deflator:
For further subversion of national stereotypes I'll leave it to the Economist:
Like some dreadful joke, the euro needs French reform, German extravagance and Italian political maturity.
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