Tuesday, July 12, 2005

European politicians demand more inflation

Europe's politicians are again calling for the ECB to inflate more by following Sweden's central bank, Riksbanken, in lowering interest rates. Belgium's Finance Minister Didier Reynders asserts that
"There is more room [for manoeuvre] on the monetary side than on the budgetary side,"

Actually, it isn't. According to its own rules, the ECB is supposed to hold consumer price inflation below 2%, yet the latest figures show more than 2% increase in the consumer price index. And the ECB is also supposed to hold money supply (M3) growth at roughly 4.5%, yet M3 is currently growing at 7.3% according to the latest figures. Asset price inflation and debt growth also indicate that the current monetary policy by the ECB is far too inflationary. Yet instead of being attacked for pursuing a more inflationary policy than they are supposed too, the ECB is being attacked for being insufficiently inflationary.

You know where there are more room to maneuver, Mr. Reynders? In the bloated European welfare states. If you reduce the incentive for wealth creation through government redistribution the result will inevitably be less wealth creation i.e. lower growth.


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