Over the last few days I have been arguing that the policy measure the ECB is expected to adopt on June 5 will have effects on real economic activity that will be neither sizeable nor lasting. Save, I added, on compensations and bonuses for CEOs, CFO,s, and CIO at banks, mutual funds, and financial intermediaries in general.
But the latter is not, of course, among the reasons why the ECB will act. I understand that one of the major reasons for acting is a perception that a dangerous deflation spiral might be setting in throughout most of Europe. And that such a spiral has to be fought against with determination, certainly through rate cuts but also keeping in mind that too-strong a Euro might be adding mightly to it. Three considerations:
- I still remember a public talk (on record) by Wim Duisemberg, first president of the ECB, where he stated forcefully that the exchange rate was not a target for the ECB to pursue. Perhaps it would be nice to be told what has changed in the meanwhile?
- The statement saying that a strong Euro might add to deflationary pressures rests on a clear-cut belief: that it cheapens imports, and especially energy imports, on the one hand; and that it keeps home goods and services that would otherwise be shipped to foreign markets. Wait a moment: once upon a time such a thing was known as a ‘competitive devaluation’. Something has changed here as well?
- Finally: why is the Euro not depreciating vs. the Dollar, given the amount of attention the press is devoting to the June 5 meeting of the governing council and the measure it is expected to take to stop deflation via a Euro depreciation? Here is some food for thought:
- just as inflation is not always and everywhere a monetary phenomenon,
- so deflation is not,
- and appreciations and depreciations are not driven by (expected) relative rates of growth of money supplies.