Curbing Europe’s Inflation Can’t Be Left to the ECB

The European Central Bank’s task in bringing inflation back under control almost makes the Federal Reserve’s job look easy. Economic conditions vary widely across the euro area’s 20 member countries, in part because the European Union’s fiscal and financial policies aren’t sufficiently coordinated. That’s a challenge that the ECB’s principal policy tool — the short-term interest rate — can’t be expected to meet. If the inflation rate, currently 7%, is to be suppressed without unintended consequences, Europe’s governments will have to do more to help.

ECB President Christine Lagarde recently announced a quarter-point rise in the policy rate to 3.25%. This slowed the recent pace of tightening, but Lagarde told investors to expect further increases: The policy rate, she explained, was now in “restrictive territory” but not yet “sufficiently restrictive.” This was less than crystal clear. What, you might ask, was stopping the bank from making its policy sufficiently restrictive right away?