Thomas Raffinot On The Eurozone Disaster

by: Scott Sumner

Thomas Raffinot sent me an interesting report on the eurozone. I had trouble copying from the pdf file, but you can read the full report here. This graph shows his estimate of how far ECB policy has diverged from the optimal policy, given the ECB's mandate:

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Free Exchange has a new post that has me a bit perplexed. Indeed there is a non-zero probability that I'm about to make a complete fool of myself. The post explains in detail why ECB policy is far too tight, using either the unemployment or the inflation metric, and then seems to end by endorsing what it calls the ECB's "masterly inactivity."

Moreover, inflation appears to have stabilised for the time being though at a pretty low rate given the ECB's target of just below 2%. The headline rate has now stayed at 0.8% since December while the core rate (excluding volatile elements like food and energy) picked up to 1% in February, having fallen to a record low of 0.7% in December. Unemployment remains high, at 12% of the workforce in January, but it has also stabilised, having remained at this level since October.

. . .

The crucial element in the new forecasts is what they show for the longer-term inflation outlook. The December projections had shown inflation falling from 1.4% in 2013 to 1.1% this year and then edging up to 1.3% in 2015. The new forecasts show it a little lower this year, at 1.0%, picking up to 1.3% in 2015 and reaching 1.5% in 2016. In his opening statement to today's press conference Mr Draghi drew attention to the fact that inflation would be rising by 1.7% in the year to the final quarter of 2016, in other words more or less at the ECB's target rate.

. . .

In its new capacity as single supervisor (a job it takes over formally in November) it is pulling out all the stops to diagnose the health of euro-zone banks and to ensure that the necessary treatment is administered. But in the more familiar realm of monetary policy, the ECB is pursuing a strategy of masterly inactivity.

Now perhaps this is just sarcasm. Those who read my comment section will occasionally see me strongly objecting to comments that were intended as sarcasm, and indeed came from commenters who agree with me. I'm a bit slow. If it was signed "R.A." I would immediately know that the "masterly inactivity" comment was meant derisively. But I'm not familiar with "P.W."

In any case, ECB policy is just completely dysfunctional. There is a case to be made for current Fed, BOJ or BoE policy, but there is no case to be made for ECB policy. It's completely inexcusable under any reasonable interpretation of the ECB's mandate, even the "German" interpretation.

Meanwhile here's what's happening in a country that until recently was mocked by American and European economists:

Kazufumi Yamamoto is having such a hard time finding waiters and sushi chefs to fill jobs at Ganko Food Service Co. that he's going to boost wages for the first time in more than a decade.

"Positions remain open for several months, leaving some restaurants heavily understaffed," said Yamamoto, personnel head at the sushi-chain operator in Osaka. "The labor shortage has worsened to the point we have no choice but to increase pay."

The troubles facing Yamamoto, 43, reflect the pressures of a labor force that's shrinking, with just nine high school graduates on the hunt for a private-sector job now for every 10 just five years ago. Smaller companies reliant on part-time workers are bearing the brunt, pressuring them into wage gains that have yet to be reflected in the broader job market.

While nationwide pay fell in the year through January, and will probably rise less than 1 percent this year, according to economists surveyed by Bloomberg News, smaller and mid-sized employers such as hand-cleaner maker Saraya Co. are considering salary gains of 2 percent or more. The nation is within a few years of an overheated job market that makes inflation, not deflation, Japan's challenge, economist Masaaki Kanno says.

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