The Troika Continues To Harm The Eurozone

The European Central Bank’s (ECB) written policy is to maintain the eurozone inflation rate at just under two percent. The ECB has consistently failed to achieve that goal. Indeed, its failure has been growing steadily. The ECB’s failure tells us something enormously important about what is wrong with the eurozone’s economy and the troika’s bleeding of that economy through austerity. 

The ECB’s increasing inability to even come close to its inflation target demonstrates that demand remains woefully inadequate in the Eurozone – making austerity an insanely self-destructive policy. The Wall Street Journal (WSJ) reported on the ECB’s latest failure in an article entitled “German Inflation Rate Plummets as Manufacturing Slows.”

So, how long does it take for the WSJ to hi-light these two analytical insights for the reader? The WSJ “buries the lead” about the eurozone’s horrific unemployment rate in the last clause of the last sentence of the last paragraph of its story. The fact that the people of Italy, Spain, and Greece are suffering a Second Great Depression disappears from the WSJ’s narrative. The words “demand,” “austerity,” “fiscal policy,” and “stimulus” never appear in the story. The WSJ is pioneering a new art. It has evolved from burying the lead to exorcising it.

Here is the WSJ’s closest approach to analysis.

“Germany’s annual inflation rate almost halved in May, heightening concern that the euro zone is facing a prolonged stretch of excessively low consumer-price growth that could derail its fragile recovery.

The sharp drop in the inflation rate came as business surveys released on Monday showed that manufacturing activity in the euro zone slowed more sharply than first estimated in May.”

What causes inflation to fall sharply even when it starts from a very low level well below the ECB’s target? A WSJ reader should want to know, but one would have hoped that the troika would want to know. The logical implication is that the journalist believes that low inflation causes recessions, which is false. Very low inflation of the kind the eurozone exhibits is a symptom of inadequate demand. The vastly more important symptom of inadequate demand is high levels of unemployment As inflation becomes very low or deflation occurs some consumers may defer major discretionary purchases, further reducing already inadequate demand and exacerbating the recession. The “inflation” theory of recession causation is wrong, but at its core it is a theory based on inadequate demand.