2,6% inflation and again no act from ECB

European inflation is above the 2% limit for already more than a year, but the European Central Bank (ECB) continues with its pro-inflation policy of low interests and massive money-print. It is no secret that the real inflation is much higher than the official but this is not officially announced as it will lead to social pressure for compensations and indexations that can add additional load to high deficit budgets around EU. But when even the official inflation is above the ceiling, when this continues long time and when all time the ECB bosses say: "No problem", then may be we just have seriously changed priorities of ECB.

ECB was intended to be the "dream" Central bank. An institution consisted of members of different countries that has the only priority to keep the price stability. And no other priorities. But now we see a serious evolution after it started buying government bonds, and decided to keep low interest rates even with real inflation existing. Not only an inflation risk. It is a real and proven by statistics inflation.

The only answer to this paradox that we hear from ECB is that next year (2013) the inflation will be 1,6% obviously trying to persuade us that this will compensate current higher inflation. But the "above 2%" inflation is real for more than a year up to now. So when will come the compensation for 2011 inflation, as 2012 is again planned to be with higher inflation? And what guarantees that in 2013 Mr Draghi will not repeat again the mantra, postponing the lower inflation for 2014?

Generally the 2% inflation is not an average value that can be exceeded some years and be under it in some other years. 2% is a limit that must make the ECB to act immediately. There is also a psychological moment here as part of the monetary regulation is based on psychology. When everyone knows that the central bank will act on 2% then everyone plans its actions based on this expectation. And this has a strong anti-inflation effect. But if the belief of inevitable intervention disappears, then the psychological effect also disappears. ECB is ruining its authority. And this is the authority of its main product - the Euro.

ECB is no more the unique central bank that is focused only on inflation. It is more like FED and BoJ that have other priorities too. But this means the Euro is no more the same Euro - a conservative and well kept currency that inherited the Deutsche Mark. It is just another Dollar, but with less history.

Trying to fight the debt crisis using monetary tools is a proven way to Hell. The currency is a very fragile element of the economy that is based generally on confidence. The currency is nothing more than confidence. If the confidence is ruined, this can entirely destroy the currency. The psychology of crowd can destroy any currency. If no one believes more in Euro, the Euro will stop existing. Then even if ECB decides to act, it will be too late. The confidence must be kept while still existing and not when already lost.

ECB is playing a dangerous gamble game with a young (in fact teenage...:)) currency like Euro. The crash can happen suddenly - even overnight. We go to bed with Euro and awake with no Euro.

I think the existence of Euro and its stability is much more important than the easy life of EU politics that don't like to make reforms. But I am not sure Mr Draghi also thinks so...

April 30th 2012

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