The ECB, according to Kantoos and Scott Sumner, is effectively targeting a stable nominal GDP path for Germany. Moreover, it is doing a fine job at it. Kantoos further shows that nominal wage growth is being stabilized around 2% a year. I take that to mean the ECB is not just effectively targeting nominal GDP, but nominal GDP per capita for Germany. This comes close to what I think is an ideal goal for monetary policy for reasons discussed here.
Now while the ECB’s monetary policy may be great for Germany it is too tight for the periphery of the Eurozone. Because this one-size-fits-all monetary policy makes it difficult for the the Eurozone to solve its current problems, the European countries seemingly face the tough choice of giving up their currency union experiment or giving up their national sovereignties to make to make the currency union more functional. Ryan Avent notes, though, that there is a third way to solve this problem: have the ECB loosen monetary policy such that there is a real appreciation in Germany and real depreciation in the Eurozone periphery. I liked his idea and followed up with this:
[H]ere is another option: more monetary easing by the ECB. As Ryan Avent explains, further easing by the ECB would cause a real depreciation for the Eurozone periphery vis-a-vis the Eurozone core:
[T]he key to a relatively painless internal revaluation is inflation in tighter markets. And it’s here that the European Central Bank could play a particularly useful role. Were the ECB to adopt a looser monetary policy, we would expect inflation to pick up first in the markets with the least excess capacity, and that would obviously mean rising prices for Germany.
Prices, therefore, would increase more in Germany than in the troubled periphery. Good and services from the periphery would then be relatively cheaper. Thus, even though the exchange rate among them would not change, there would be a relative change in their price levels. This would make the Eurozone periphery more externally competitive. The relative price level change would not be a permanent fix to structural problems facing the Eurozone, but it would provide more time to address the problems.
Of course, this option seems unlikely. My impression is that the one thing Germans hate more than Eurozone bailouts is Eurozone inflation. Any thoughts Kantoos?