Don't Worry

Former ECB Chief Economist Issing Says Deflation Fears Are Misplaced

Former ECB Chief Economist Otmar Issing. Source: Bloomberg
Otmar Issing was the ECB's first chief economist.

Otmar Issing had a decisive influence on the European Central Bank during its developmental phase. Even today, the bank’s former chief economist closely observes the activities in the ECB’s Eurotower in Frankfurt ― including the current debate about deflation. Handelsblatt reporter Dorit Hess interviewed Issing recently.

Handelsblatt: Mr. Issing, the fact that today in Europe we have a quantitative target value for stable prices is essentially due to your efforts. How did this definition arise?

In 1998 during the phase of setting up the European Central Bank, we were confronted, while developing our strategy for monetary policy, with the question as to whether we would simply issue a general definition of price stability, as the German Central Bank had done, or whether we would determine a target value. I was in favor of a clear definition that, right from the beginning, would allow no doubts to arise with regard to a stable currency. I was able to convince my colleagues, and we initially defined values under 2 percent as stable prices.

Today the ECB speaks of stable prices when they are situated “under but near 2 percent.” Why is that?

In 2003 when reworking our strategy for monetary policy, we modified the definition slightly. We were responding in this way to the criticism made by the European Parliament and others that we had previously given consideration only to the danger of inflation, but not to that of deflation.

“There is no cause for worry. It is utterly inappropriate to dramatize the 0.4 percent rate of inflation.”

Why this figure? Aren’t prices stable when they don’t change at all in other words, a zero percent increase in prices?

There are two conceptional reasons: With the definition we selected, deflation dangers are excluded even if there are mistakes in the measurement. And since the rate of inflation in the euro zone represents an average value, a figure under but near 2 percent guarantees that some countries don’t have to be in minus in order to reach the target value.

For months now, the rate of inflation has been veering strongly away from that value. Does that disturb you?

There is no cause for worry. It is utterly inappropriate to dramatize the 0.4 percent rate of inflation. The low figure is due above all to a decrease in energy prices — and that is very good news for the consumer.

But not for the ECB. Doesn’t it have a credibility problem when it diverges from its own value?

No, there would only be a problem if the expectations of inflation also had to be corrected in a downward direction. But up to now, that hasn’t been the case. Once again, what is crucial is the actual cause for the low consumer prices.

So what is causing the uproar?

The Fed and the IMF raise fears about a deflation process at almost regular intervals — with no justification. Not even in Japan has that sort of downward spiral happened, despite a long period of negative rates of inflation.

Is what is going on perhaps also the search for arguments in favor of the use of unconventional instruments?

There are all sorts of possible motives. That is doubtlessly one of them. The search by some media or analysts for an alarming theme is certainly another. So a level-headed evaluation is all the more important: There is no proof that a risk of deflation exists.

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