Europe’s inflation fundamentalism
FP Editor in Chief Moisés Naím and the Carnegie Endowment’s Uri Dadush have an op-ed in today’s Financial Times arguing that Europe’s excessive fear of inflation is preventing it from taking the action necessary to prevent a potentially catastrophic crash of the Greek economy: There are ways to mitigate the pain. For example, Germany and ...
FP Editor in Chief Moisés Naím and the Carnegie Endowment's Uri Dadush have an op-ed in today's Financial Times arguing that Europe's excessive fear of inflation is preventing it from taking the action necessary to prevent a potentially catastrophic crash of the Greek economy:
FP Editor in Chief Moisés Naím and the Carnegie Endowment’s Uri Dadush have an op-ed in today’s Financial Times arguing that Europe’s excessive fear of inflation is preventing it from taking the action necessary to prevent a potentially catastrophic crash of the Greek economy:
There are ways to mitigate the pain. For example, Germany and other countries could adopt more expansionary fiscal policies for a while. Or, more powerfully, the wider euro area could adopt more expansionary monetary policies for several years. Today, this second option is anathema as the “inflation fundamentalists” will have none of it. This elite of central bankers, top economic officials, politicians, academics and journalists maintains the risks of allowing inflation to climb above 2 per cent are unacceptable.
Their view is informed by the disastrous experience with hyperinflation in Germany in the 1930s and stagflation in industrial countries in the 1970s and 1980s. Undoubtedly, moderate inflation can creep up to become high inflation. But, like many good ideas that take on the mantle of a cult, inflation fundamentalism can hurt. There is little if any empirical evidence that moderate inflation that stays moderate hurts growth. In most countries, cutting actual wages is politically difficult if not altogether impossible. But, to regain competitiveness and balance the books, real wage adjustments are sometimes inevitable. A slightly higher level of inflation allows for this painful adjustment with a lower level of political conflict.
Read the whole thing here.
Joshua Keating was an associate editor at Foreign Policy. Twitter: @joshuakeating
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