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W
eaker commodity prices, troubling trade figures and runs on the global equity
markets have made it necessary for Mario Draghi, the European Central Bank’s
President, to downgrade the ECB’s quarterly inflation forecasts on several occasions
in recent years.

In September last year it downgraded its target to 1.2% ECB would take action to stop its ascent as proved by the
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for 2018 and 1.5% for 2019 . Draghi stated at the Euro’s performance against the USD during the past six
September policy meeting that it was necessary to months82. The reason a strong currency affects inflation
maintain a loose money supply in order to shore up the is because it increases the number of goods and services
European Union’s economic revival. Nevertheless, the imported from a country with a weak currency because
move did come as a surprise given that the ECB had they become cheaper to import when the strong
sounded confident about meeting its 2% target by 2019. currency’s value rises. In theory this should mean that
exports become more expensive so countries outside the
Eurozone will be less likely to import from countries in the
Euro meaning less money being spent in these countries,

fewer jobs created by companies and therefore less
disposable income which keeps inflation low. But in the

past eighteen months the Eurozone economies have
expanded and still inflation is low so why is this?

In Europe growth acceleration has been fuelled by an
appetite for sustained, strong demand which is the result

of expansionary policies that have expanded the money
supply. This growth has been created by corporate and

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Inflation rate (Harmonised Index of Consumer Prices) consumer confidence which is a reaction to the
expansionary measures (e.g. quantitative easing) as
business and the public realise that such measures help
One of the problems is wage growth and the ECB is stem both systematic and specific risk. This confidence
therefore hoping that the current surge in economic has also been maintained through a changing political
activity continues which will help plug this hole. However, climate in Europe which, as of yet, has had no significant
recent data has reported EU wage growth at 1.6% which long-term bearing on the continent’s economies and
is below the ECB’s target of 1.8% 80 laid out at the markets. Yet inflation has not picked up despite the
September meeting. Hopes of reaching the target were backdrop of growth in productivity and a strong labour
dashed because of unemployment remaining just over market which presents a problem for the ECB because it
7%. Obviously, the prospects of wage growth will improve cannot continue its expansionary policy forever as it tries
if unemployment falls although employment is still to hit an annual inflation target of 2%.
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strong .
Typically, low inflation can be attributed to the strength
of a currency. Draghi tried to emphasise the ECB’s
concern of what effect a strong Euro means but failed to
persuade the markets that the

78 https://marketrealist.com/2017/09/why-did-the-ecb-downgrade-its- 80 https://tradingeconomics.com/european-union/wage-growth
inflation-outlook 81 http://ec.europa.eu/eurostat/statistics-explained/index.php/Main_Page
79 http://sdw.ecb.europa.eu/ 82 https://www.xe.com/currencycharts/?from=EUR&to=USD&view=1Y