In a dramatic change of course that just a few years ago would have seemed unthinkable, the European Central Bank (ECB) last week unanimously decided to revise its inflation strategy for the first time in 20 years. The ECB has decided to abandon the powerful doctrine that 2% inflation is the highest acceptable level, adopting as a new strategy on prices hikes.
The doctrine of having a zero tolerance for inflation was a ghost that haunted German economic thought for many decades. The German obsession with price stability has its roots in the interwar period, when due to the economic crisis all confidence in the German mark was lost and inflation climbed to unimaginable levels. The great economic problems and the humiliating - unrealistic terms of the Treaty of Versailles, imposed on the Germans by the victors of the First World War, caused instability, which led to Hitler's rise to power. The experience of high inflation, the devaluation of the mark, the rise of Hitler and the drama of the war tragically marked German history. Preventing a new inflationary adventure (and the troubles that followed) monopolized German economic thought after the war.
How the change happened
The ECB's historic decision to drastically review its inflation strategy did not come overnight and was a combination of many factors. The basis for the change was an understanding of lessons from the debt crisis in the euro area and an awareness of the need for joint action. The crisis gripped the European institutions as they reacted spasmodically, pursuing punitive policies that had little to do with the real economic problem at hand.
- Pandemic-recession. The great turmoil in the world economy caused by the pandemic mobilized authorities by imposing the adoption of emergency measures and policies needed to meet the conditions.
- Structural changes in societies and economies. The technological revolution and the impact on productivity, the declining rate of productivity growth, the aging population and demographic fatigue are shaping a new framework and requiring new solutions.
- The technocrats of the ECB examined in depth experiences of the past, approached the new problems in light of various theories and presented a substantiated argument for the need to redefine strategies and priorities.
- Finally, the key figure was ECB president, Christine Lagarde, who managed to align different approaches, initially, and lead the ECB forward.
The ECB's emergency measures are aimed at addressing the effects of the pandemic on economies including Greece’s, despite the fact that our country still does not have an investment grade status on its bonds. The purchases of Greek bonds by the ECB have led to historically low lending rates in Greece, removing concerns about debt sustainability, while allowing our country to improve its debt profile.
YIANNIS PAPADOGIANNIS