Higher Inflation Is Not the Solution
Letter to the Editor

Sir, Uri Dadush and Moisés Naím advocate higher inflation in the eurozone's core countries as a solution to the competitiveness problems of the eurozone's peripheral countries ("We should beware of the cult of very low inflation," March 5). This is misguided in at least two respects.

First, their proposal glosses over the fact that over the past 10 years Greece, Spain and Ireland have all lost anywhere between 20 and 30 percentage points in wage and price competitiveness. If higher inflation in the eurozone's core countries is to meaningfully help address the competitiveness problems at the periphery, it would have to be at a rate that would have adverse consequences for the eurozone's long-run economic performance.

Second, Mr Dadush and Mr Naím, like Olivier Blanchard before them, totally ignore the very negative impact that a move to a higher inflation target must be expected to have on the European bond market. At a time of unprecedented peace-time budget deficits and skyrocketing public debt to gross domestic product ratios, one must expect that any hint of a more relaxed inflation stance at the European Central Bank would trigger a bond market rout. Higher long-term interest rates would seem to be the last thing that a fragile eurozone recovery now needs.

Desmond Lachman is a resident fellow at AEI.

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