The temptation in the euro zone to not fight inflation must be resisted

There may now be a temptation in the euro zone to not fight inflation: this would make it possible to keep real interest rates negative and therefore to continue to conduct highly expansionary fiscal policies; to easily make investments in the energy transition that have low financial returns; and to avoid having to drive up unemployment (above structural unemployment) to get inflation back down. But not fighting inflation in the euro zone would have serious consequences: All incomes would have to be re-indexed to prevent losses of purchasing power. Moreover, in an indexed economy with a depreciating exchange rate, inflation and expected inflation could become very high; It is important to not overlook that inflation imposes a tax on all money balances, which in reality would reduce income sharply. One must also bear in mind that the negative real long-term interest rates that would result from the decision to not combat inflation would tax low-income households (which save primarily in bonds) and give rise to asset price bubbles and severe financial instability. It is therefore not at all certain that the path of least resistance, where the ECB refrains from fighting inflation, will lead to greater well-being than an equilibrium where inflation is kept low.