What should the ECB do?

In the comments, Gareth writes:

Target nominal GDP growth of at least 5% for all EU countries, and back it with a threat of unlimited QE. Italy needs a primary surplus of 6%+ with current yields. That drops to around 3% if NGDP growth rate goes up from predicted 2.5% to 5%.

And back in reality, they could at least raise the inflation target to 4%.

I don’t think he and I disagree on the underlying economic theory, but I suspect this would be too little.  At zero growth, that means five percent price inflation a year and basically an open fire hose to the Italian Treasury.  That also means they never reform, noting that I accept the Keynesian point that at this time horizon fiscal reform is counterproductive.  But “no reform” is counterproductive too!

In my view, the growth simply isn’t there, not now, not even with looser monetary policy.  Eurozone inflation is already about three percent, and while I understand the Sumneresque credibility point at current margins nothing seems credible for the eurozone, there is only the present.  Why should another two percent inflation a year turn the tide?  The inability to implement any kind of credible rule means that the “in the moment” solution has to be all the stronger.  So the “answer,” if that is the right word, is ten percent inflation a year for the eurozone — plus the firehose to Rome — to get the real value of those debts down and quickly.  Maybe twelve.

I don’t feel like debating whether this would be better or worse than the status quo; I am content to suggest it probably won’t happen, not even if German and French leaders understand the gravity of the situation, which I suspect they do.  (The Germans, believe it or not, “do gravity well” and have for some time.)  It’s a common meme these days that the German leaders “don’t get it,” but I view it in reverse: they’re the ones who understand how grave a problem it is, and how truly hard to fix it would be, which is why they are not doing more.  They don’t see the point in pulling out the peashooter against the elephant, and the blunderbuss is not yet available, if it ever will be.

Addendum: Kevin Drum comments.


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