Open letter to M Jean-Claude Trichet, President, European Central Bank
Of course, the main European economic problems are structural; or - as you once said before taking up your present post - labour costs are too high.
Samuel Brittan Financial Times June 10 2005
Nominal GDP is simply GDP before correcting for price changes. It is approximately the sum of real growth plus inflation. Given an inflation target of just below 2 per cent, normal growth for nominal GDP should be somewhere between 4 and 5 per cent per annum. It was in this range during the period when monetary union was being established from 1997 to 2001 inclusive. But since then it has been much less - between 2½ and 3¾ per cent.
Nominal GDP was a hobbyhorse of mine during the early British debates on monetary policy. I have gone quiet on advocating it in the UK partly because the British version of inflation targets has so far worked surprisingly well in delivering real as well as nominal stability. UK nominal GDP growth has remained almost entirely within a stable corridor of 4½ to 6 per cent since Bank independence.
Of course, the main European economic problems are structural; or - as you once said before taking up your present post - labour costs are too high. No tinkering with monetary policy can remove this weakness. But it can help remove any element of demand deficiency and perhaps create a climate more favourable to structural reform. Some reforms, while beneficial to employment in the long run, can have a short-term impact in shaking out uneconomic jobs. An assurance that flexibility in labour costs will in the not too distant future be reflected in more growth and jobs could help.