Posted by: Ben Vickers on November 3, 2011
ECB President Mario Draghi may have to take another look at euro-zone inflation. His predecessor in the post, Jean-Claude Trichet, never tired of saying how the bank had delivered the longest period of price stability Europe had ever seen. And he was right: euro-zone price increases excluding energy have largely fluctuated between 1 percent and 2.5 percent ever since the single currency began circulating almost ten years ago.
However, the ECB’s claim hides important regional differences that help explain some of the tensions that have surfaced in the debt crisis. Inflation in Germany has been below the ECB’s 2 percent target every year except one since the euro was introduced. Meanwhile, inflation in countries such as Spain, Portugal and Greece has consistently been higher than the ECB’s target.
Portuguese inflation has been above 2 percent in seven out of the past ten years, almost reaching 4 percent in 2002. Spain has fared worse, with inflation above 3 percent in five out of ten years. Inflation in Greece has been well above 3 percent in four years and has never dropped close to 2 percent.
The effect of these different rates of inflation has been to effectively impoverish consumers in so-called peripheral euro nations relative to their German counterparts. The ECB has a remit to maintain price stability in the medium term for the whole region - but these regional differences need to be reversed if other measures to improve the competitiveness of peripheral nations are to have full effect.