Inflation about 2 per cent in EU-28
A central bank that is printing money and thus increasing the money supply is likely to spark inflation, if the economy operates at full capacity.In that case, people have more money in their pockets and they want to spend at least some of it on consumer and other goods. But since the production of goods and services has already approached its capacity limit there are not more goods to buy in the short-term. Thus, higher demand could only translate into higher prices.
However, this simplified textbook case of full capacity utilization is hardly relevant in the European context. On the contrary, in many Member States economic resources lie idle, especially labour. In Spain and Greece, the unemployment rate has already climbed to around 27%, a situation in which inflation fears are completely ill-founded. Unless trust in the banking sector is restored and lending to households and businesses resumes, the expansion of the money supply is unlikely to feed into effective demand. Since households and firms find it hard to obtain loans for purchasing goods and services, they are unable to increase their expenditure and to cause a surge in prices.
Indeed, one should also bear in mind that the ECB aligns its monetary policy to the euro area as a whole and not just to a couple of individual (German-speaking) countries. In the past decade, the common monetary policy of the ECB resulted in very low inflation rate in Germany and Austria, while countries such as Ireland and Spain recorded significantly stronger rises in prices. On average, however, the inflation rate was close to 2% (equivalent to the ECB target). If countries like Portugal and Italy want to regain price competitiveness by allowing wages and prices to grow only very weakly in the future (e.g. by 1%), inflation in other countries of the euro area must be higher than 2%, so the average remains around 2%. In fact, inflation rates of 3% in Germany and Austria for a few years would not constitute an economic disaster. For example, the average inflation rate in the economically prosperous years of the 1980s and 1990s was noticeably higher than 2%.