How Europe’s low inflation impedes fiscal and structural reform … Europe does not yet have its equivalent of Japan’s Abenomics, but Mario Draghi, president of the European Central Bank, pretty much advocated it in his press conference last week. Europe, he said, needs fiscal, monetary and structural policy working together, the three arrows of Abenomics. He acknowledged the ECB’s duty of getting inflation, now 0.3%, back up to its target of near 2%. But the ECB, he said, can’t rescue Europe alone: it needs help from fiscal and structural reforms. – Economist
Dominant Social Theme: Inflation is key. Debasing the currency is necessary for progress and prosperity.
Free-Market Analysis: This Economist article is all about why price inflation is necessary to help Europe’s bleeding economies achieve “fiscal consolidation.”
Fiscal consolidation is a polite descriptive term for raising taxes and cutting government spending. Inflation helps this process because while it’s taking place, prices rise, disguising the cuts and additional taxes. Price inflation “softens the blow,” in other words.
And that is what The Economist deems important. Governments need to be efficient. Voters need to be lulled. Here’s more:
Of course, … monetary policy can’t initiate fiscal consolidation or liberalize product and labour markets, and … both those things are essential to Europe’s long term health. But the ECB can help determine whether either of those things succeeds.
For Europe’s fiscal and regulatory policy makers to do their jobs, it will help immensely if the ECB does its own. Let’s start with fiscal consolidation. Mr Draghi’s predecessor, Jean-Claude Trichet, used to extoll the stimulative benefits of fiscal consolidation; the confidence of investors and business would soar when they saw government finances put on a stable path.
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This post was published at The Daily Bell on September 10, 2014.