Edin Mujagic

In a recent speech, Christine Lagarde highlighted the dire implications of prolonged high inflation, linking it to the very fabric of democracy. This sentiment, echoed in my book “Turning Point 1971,” underlines the non-economic ramifications of inflation, often overshadowed by its economic impacts.

The European Central Bank (ECB) has recently reported that money growth in the eurozone saw a decline in August. The M3, a broad measure of money supply, witnessed a drop for the first time in over a decade.

This further dip in money supply during August is encouraging news in the context of inflation targeting. Excessive money growth can lead to high inflation in the medium term.

The European Central Bank (ECB) may not openly acknowledge it, but behind the scenes, goodwill is slipping away. Goodwill represents the intangible, invisible value of a company. When applied to a central bank, it refers to the willingness to make unpopular decisions in the short term, such as raising interest rates when inflation skyrockets. Since 2021, the ECB has squandered much of its goodwill, but during June, it has managed to regain a fraction of it.

Forget about all those bars of gold that are heavily guarded because they are incredibly valuable. Credibility is the most valuable asset for a central bank. It is the monetary version of what goodwill is to a company. In this respect, the ECB could learn a lot from the Fed. An analysis.

The more credible a central bank is, the more effective its policy is. With high credibility, a central bank needs to do less actual work to achieve the desired result: bludgeoning inflation. More words, and less action, so to say.

“In accordance with Article 105(1) of the Treaty, the primary objective of the ESCB shall be to maintain price stability.”

Time and again I look for it. And every time I do not find it. What is it about? I look for the word “money growth” in interviews and speeches by board members of the European Central Bank. That is strange and revealing at the same time.