When the European Central Bank’s Governing Council met on December 14, there was little to surprise financial markets, because no policy changes could be gleaned from public remarks. The previous meeting, in late October, had already set the stage for the normalization of monetary policy, with the announcement that the ECB would halve its monthly asset purchases, from €60 billion ($71 billion) to €30 billion, beginning in January 2018.

The motivation behind normalization does not appear to be the eurozone’s inflation performance, which continues to undershoot the target of roughly 2% by an uncomfortable margin. Inflation expectations, while inching up recently, also appear anchored well below target, despite recent soaring confidence readings. And the ECB’s own forecast suggests that it does not anticipate that price growth will breach 2% anytime soon.

What about the output gap? In step with the US Federal Reserve, the ECB nudged its growth forecasts higher. In that setting, R-star (the natural rate of interest) may be perceived as drifting up, in line with output moving closer to potential across a broad swath of eurozone economies.

Still, OECD estimates of the 2017 (and 2018) output gap for most of the eurozone countries (Germany and Ireland are notable exceptions) suggest that there is slack, and in numerous cases considerable slack. While German unemployment, now below 4%, is at its lowest level since reunification, EU unemployment still hovers around 9%. Given this, it appears premature to view fears of eurozone overheating as the main driver of monetary-policy normalization.

Perhaps there are other motives for normalization that the ECB doesn’t discuss publicly. Financial stability comes to mind. After all, the Fed does not forecast recessions, and the International Monetary Fund usually does not issue public pronouncements on a country’s odds of default. The silence reflects an understandable desire to avoid fueling a self-fulfilling process.

The risks to financial stability from keeping interest rates too low for too long are neither new nor unique to the eurozone. At the risk of oversimplifying, the gist of these arguments is that ample and inexpensive credit inflates asset-price bubbles, encourages excessive risk taking, drives up leverage, and may even delay necessary economic reforms.

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