When Greece hit the skids almost four years ago, some analysts (myself included) thought that we might be seeing the beginning of the end for the euro, Europe’s common currency. Others were more optimistic, believing that tough love—temporary aid tied to reform—would soon produce recovery. Both camps were wrong. What we actually got was a rolling crisis that never seems to reach any kind of resolution. Every time Europe seems ready to go over the edge, policy makers find a way to avoid complete disaster. But every time there are hints of true recovery, something else goes wrong.
And here we go again. Not long ago, European officials were declaring that the Continent had turned the corner, that market confidence was returning and growth was resuming. But now there’s a new source of concern, as the spectre of deflation looms over much of Europe. And the debate over how to respond is turning seriously ugly.
Some background: The European Central Bank or ECB, Europe’s equivalent of the Federal Reserve, is supposed to keep inflation close to 2%. Why not zero? Several reasons, but the most important point right now is that an overall European inflation rate too close to zero would translate into actual deflation in the troubled economies of southern Europe. And deflation has nasty economic side effects, especially in countries already burdened by high debt.
So it’s a source of great concern that European inflation has started dropping far below target; over the past year, consumer prices rose only 0.7%, while “core” prices that exclude volatile food and energy costs rose only 0.8%.
Something had to be done, and last week the ECB cut interest rates. As policy decisions go, this had the distinction of being both obviously appropriate and obviously inadequate: Europe’s economy clearly needs a boost, but the ECB’s action will surely make, at best, a marginal difference. Still, it was a move in the right direction.
Yet the move was hugely controversial, both inside and outside the ECB. And the controversy took an ominous form, at least for anyone who remembers Europe’s terrible history. For arguments over European monetary policy aren’t just a battle of ideas; increasingly, they sound like a battle of nations, too.
For example, who voted against the rate cut? Both German members of the ECB board, joined by the leaders of the Dutch and Austrian central banks. Who, outside the ECB, was harshest in criticising the action?