Is Sarkozy wrong on the Euro?

Free Exchange reports:

Defending the central bank’s independence, European finance ministers warned Nicolas Sarkozy, the incoming French president, not to blame the ECB for France’s economic woe.  While electioneering, Sarkozy suggested the ECB’s policy objective be amended from achieving price stability within the Euro Zone to focus on job creation and growth.

Sarkozy is, in my view, correct to think that a bit more inflation would improve the French macroeconomy.  France has about the stickiest nominal wages on Planet Earth.  A little extra inflation would boost the labor market by allowing real wages to fall.  Some inflation might also spur exports in the short run.  Do note that the latter effect is, in the first best, cancelled by the inferior French command over non-Euro-denominated imports.  Still the job gains might offer some second best benefits in this context, such as alleviating social tensions. 

That said, two very important qualifiers are required:

1. It is not useful for a French politician to make ECB policy a political issue in front of the public.  If the ECB gives in to French politicians at their whim, it is not long for this world.

2. The Euro probably requires a lower rate of price inflation than does the dollar, even though European wages are stickier.  "Price stability" is focal, more or less.  "Three percent inflation" is not.  There are now 13 countries in the Eurozone, maybe someday 25.  Zero is a good number to agree upon, perhaps it is the only number they can agree upon.

This all reflects a very real tension behind European monetary policy.  It is much harder to have monetary discretion when many nations belong to the currency union and have an ultimate voice in what happens.  I view the current structure of the ECB as somewhat of a contraption.  France and Germany had favored strong ECB independence and a price stability mandate and they more or less forced everyone else in Europe to play that game, whether they liked it or not.  Can Portugal and Italy really today make such a stink about tight monetary policy?  No.  But Germany can’t do the enforcing all on its own.  Sarkozy needs to not only give in to Merkel, he needs to signal that he will return France to its previous role as partial enforcer of tight monetary policy.  Is he up to so much humbling so soon?

Sarkozy is still right on the economics, so I wonder if he’ll be able to see his way past that.  Three percent inflation would be better for France over the next five years.  It would not be better for Europe over the next thirty.


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