The euro has become a currency on steroids. Its relentless nominal and real appreciation since the end of 2000 was briefly interrupted in the second half of 2008, but resumed with a vengeance during 2009. The strength of the currency is hurting the exporting and import-competing sectors of the Euro Area. Unemployment and excess capacity continue to rise. The euro's excessive strength is also contributing to a significant and persistent undershooting of the rate of inflation the ECB deems to be consistent with price stability in the medium term: headline HICP inflation in December 2008 was 1.60 percent in December 2008, hit zero in May 2009 and has been negative since then. .... What accounts for the strength of this über-currency? The profession's inability to understand, let alone predict, things monetary is amplified when it comes to explaining or predicting the relative price of (at least) two currencies. Nevertheless, any disinterested observer would be hard-pushed to avoid the conclusion that the Eurozone is paying the price for the ECB's excessively tight monetary policy. The ECB's monetary policy is excessively tight in relation to the ECB's self-imposed quantitative expression of its Treaty-based price stability mandate. In the ECB's own words: "The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term." There is no doubt in my view that the ECB has an asymmetric interpretation of its price stability mandate. Excessive inflation is to be avoided at all cost. However, excessive deflation can be tolerated and rationalized.
The ECB's monetary policy is excessively tight in relation to the ECB's self-imposed quantitative expression of its Treaty-based price stability mandate. In the ECB's own words: "The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term."
There is no doubt in my view that the ECB has an asymmetric interpretation of its price stability mandate. Excessive inflation is to be avoided at all cost. However, excessive deflation can be tolerated and rationalized.
