The key question to assess the ECB's monetary policy

To assess the ECB's monetary policy, which became very expansionary from 2014-2015, the key question is: Has the euro zone remained in deflation with a shortfall in demand since 2014? If the answer is yes, then the ECB’s policy is justified; On the contrary, if the euro zone had exited deflation and returned towards full employment, the ECB would have to generate leeway to be able to react during the next economic slowdown. This analysis makes it possible to emphasise an important point: there can be an external surplus without there being a need to stimulate demand. If there is full employment, and if domestic demand is weak relative to production at full employment, there is an external surplus; stimulating domestic demand in this configuration would reduce the external surplus but would have no impact on production. Moreover, the low level of inflation in the euro zone is explained by companies’ lack of pricing power, not under-employment.