Vaidas Urba sent me the latest ECB report:
The March 2015 ECB staff macroeconomic projections for the euro area foresaw annual HICP inflation at 0.0% in 2015, 1.5% in 2016 and 1.8% in 2017. In comparison with the Eurosystem staff macroeconomic projections published in December 2014, the inflation projection for 2015 had been revised downwards, mainly reflecting the past fall in oil prices. In contrast, the inflation projection for 2016 had been revised slightly upwards, also reflecting the expected impact of recent monetary policy measures.
As regards measures of longer-term inflation expectations, the ECB Survey of Professional Forecasters for the first quarter of 2015 indicated that the expected five-year-ahead inflation rate was 1.77%. Medium and long- term market-based measures, such as forward inflation-linked swap rates, had broadly stabilised since the previous monetary policy meeting.
. . .
With regard to the monetary policy stance, the members generally shared the assessment that significant positive effects from the monetary policy decisions taken on 22 January 2015, in conjunction with the package of measures decided in June-September 2014, could already be seen, namely an easing in financial market conditions and in the cost of external finance for the private economy. Moreover, recent data on economic activity had been somewhat positive and there were signs of a turnaround in inflation dynamics, including a stabilisation in market-based measures of inflation expectations. This provided grounds for “prudent optimism” regarding the scenario of a gradual recovery and a return of inflation rates to levels closer to 2%. It was recalled that the March 2015 ECB staff macroeconomic projections were predicated on the full implementation of all monetary policy measures taken by the Governing Council, including the expanded APP comprising monthly purchases of €60 billion, which were intended to be carried out until the end of September 2016 and, in any case, until the Governing Council saw a sustained adjustment in the path of inflation consistent with the aim of achieving inflation rates below, but close to, 2%. The March 2015 projections should therefore not be interpreted as suggesting that the latest monetary policy measures were less necessary. On the contrary, they confirmed that full implementation of these measures was required to deliver on the Governing Council’s mandate. At the same time, the Governing Council would continuously assess the effectiveness of the measures and would regularly review progress towards the attainment of the objectives as evidence accumulated over time.
The ECB thinks the current stance of monetary policy is just right. (I think that’s crazy, but it doesn’t matter what I think.) The ECB also called for structural reforms, but pointedly did not ask for fiscal stimulus, indeed cautioned against slacking off on the deficit reduction targets. Given their insane monetary policy, their stance on fiscal policy makes sense.
For instance, suppose the Germans were suddenly to do lots of fiscal stimulus, what effect would that have? Both theory and empirical evidence suggest it would be a beggar-thy-neighbor fiscal policy. The ECB believes it would have to tighten monetary policy to avoid overshooting their 1.8% inflation target. Yes, the German stimulus would boost NGDP in Germany. However since overall eurozone NGDP would be stabilized via monetary offset, non-German NGDP would have to decline. This might occur through a stronger euro, for instance.
Indeed this is exactly what happened in 1992, when German fiscal stimulus associated with reunification led to a stronger ECU, which drove countries like Britain and Sweden deeper into recession and eventually out of the EMS.
The ECB may be completely incompetent at monetary policy, but give them credit for opposing the type of fiscal policies that caused all sorts of problems in 1992.
PS. Also give the ECB credit for understanding the circularity problem—note the last portion of the third paragraph quoted above.
PPS. I don’t know if anyone’s trademarked “beggar-thy-neighbor fiscal stimulus” yet, but if not I get first dibs.