Mar 6, 2025, 4:47  PM Dear President Christine Lagarde, Vice President Luis de Guindos, and Chief Economist Philip Lane,

We hope this message finds you well. As European leaders committed to ensuring the economic stability and growth of our region, we would like to share our proposed 4-Point Criteria for Managing Inflation and Monetary Policy. We believe that adopting these criteria will help create a more stable and prosperous economic future for Europe.
1. Money Supply Increase Up to 6%

It is crucial to control the money supply (M3) to prevent excessive inflation. Increasing the money supply by up to 6% ensures that there is enough liquidity to support economic growth without causing runaway inflation. According to the ECB's own report on monetary developments in the euro area for December 2024 (published on 29 January 2025), the annual growth rate of the broad monetary aggregate M3 decreased to 3.5% in December 2024 from 3.8% in November, averaging 3.6% in the three months up to December. The components of M3 showed the following developments:

The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 1.8% in December from 1.5% in November.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 4.5% in December from 6.1% in November.

The annual growth rate of marketable instruments (M3-M2) decreased to 16.3% in December from 17.0% in November.

These figures indicate that there is clear room for a 0.5% rate cut to foster economic growth. Unfortunately, the ECB missed this opportunity last January and again this month. This oversight reflects a Keynesian approach which will not get Europe out of stagflation.
2. Inflation Target of 2%

Maintaining an inflation target of 2% helps anchor inflation expectations and provides a stable economic environment. This target is essential for guiding monetary policy decisions and ensuring that inflation remains within a manageable range.
3. Observance of RGDP Levels

Always monitor Real GDP (RGDP) levels to ensure that economic growth is on track. If there is only a 0.5% increase in RGDP, it is crucial not to raise interest rates unnecessarily, as this could stifle economic growth. This approach ensures that monetary policy supports sustainable economic development.
4. Hold Your Nerve by Monitoring with Anticipation

Policymakers must remain calm and patient, continuously monitoring economic indicators and anticipating future trends. This approach helps in making informed decisions and avoiding knee-jerk reactions that could destabilize the economy.

By adhering to these four criteria, we can ensure a more stable and prosperous economic future, avoiding the mistakes of the past and learning from polymaths like Hearn, Friedman, von Mises, and Hayek. We believe that the current approach, which does not use these criteria as preventive or upfront control measures, results in a "needle in the haystack" approach to interest rate policy, as it does not adequately monitor the quantity of money. Failure to work on the root causes ends up taking misguided decisions with the uncertainty umbrella as the reason when it is neither a reason, nor a microeconomic factor, it is purely some form of Keynesian capitulation. Europe needs a rate cut of 0.5% to foster growth, yet we observe a continued Keynesian approach that perpetuates a hidden stagflation.

As John Hearn aptly puts it, "It is important to focus on the difference between average prices and individual market prices. Average prices only change if output contracts with the same quantity of money or the quantity of money grows faster than output. Tariffs do not do either so they will change individual market prices but will not increase an average which requires more units of money used in the same number of transactions. Therefore tariffs are not inherently inflationary."

Our proposed criteria emphasize a macroeconomic preventative and upfront control approach. By proactively managing the money supply, setting clear inflation targets, observing RGDP levels, and patiently monitoring economic indicators, we can prevent inflation and promote sustainable growth. In contrast, the current after-the-fact microeconomic approach lacks control and is less effective in addressing the root causes of inflation. Failure to work on the root causes ends up taking misguided decisions with the uncertainty umbrella as the reason when it is neither a reason, nor a microeconomic factor, it is purely some form of Keynesian capitulation.
21 Reasons Why Hearn, Friedman, von Mises, and Hayek Would Fully Support Our Criteria

Historical Success: Monetarist policies have historically succeeded in curbing inflation, as seen in the Volcker shock of the early 1980s in the US.

Focus on Money Supply: Controlling the money supply directly targets the root cause of inflation, as illustrated by Friedman’s quantity theory of money.

Preventing Asset Bubbles: Limiting money supply growth reduces the risk of asset bubbles and maintaining stable interest rates is crucial. As observed with Zero Interest Rate Policy (ZIRP), you get bubbles.

Long-term Stability: Prioritizing stable money supply growth fosters long-term economic stability, as demonstrated by the Bundesbank’s focus on monetary stability.

Avoiding Boom-Bust Cycles: Controlling the money supply helps avoid artificial booms and busts, as explained by Hayek's business cycle theory.

Independence from Fiscal Policy: Independent monetary policy prevents the politicization of economic decisions, ensuring balanced economic management.

Anchoring Expectations: A clear inflation target anchors inflation expectations, reducing uncertainty for businesses and consumers.

Market-Driven Adjustments: Allowing markets to adjust naturally prevents distortions and promotes efficient resource allocation.

Avoiding Overreach: Limiting central bank interventions prevents unintended consequences and promotes financial stability.

Transparency: Clear and consistent monetary policies enhance transparency and predictability, fostering confidence among market participants.

Historical Lessons: Lessons from past monetary mismanagement highlight the importance of controlling the money supply to prevent hyperinflation.

Global Integration: Stable monetary policies support global trade and investment, benefiting the broader economy.

Mitigating Moral Hazard: Avoiding excessive monetary interventions reduces moral hazard and encourages responsible behavior among financial institutions.

Encouraging Savings: Stable money supply growth encourages savings and long-term investment, promoting economic growth.

Preventing Fiscal Dominance: Independent monetary policy prevents fiscal dominance, ensuring that fiscal policy does not undermine monetary objectives.

Fostering Innovation: Stable economic environments promote innovation and entrepreneurship, driving economic progress.

Global Competitiveness: Competitive markets driven by sound monetary policies enhance global competitiveness.

Avoiding Depreciation: Controlling money supply prevents currency depreciation and maintains purchasing power, ensuring economic stability.

Supporting Fiscal Discipline: Sound monetary policies encourage fiscal discipline among governments, promoting sustainable fiscal practices.

Evidence-Based Policy: Empirical evidence supports the link between money supply and inflation, validating the monetarist approach.

Awareness of Time Lags: Awareness of time lags between monetary actions and outcomes is crucial. Changes in the money supply may take one to two years to fully work through the economy, hence stable quantity of money and price of money are preferred.

We kindly urge you to consider adopting this 4-Point Criteria for Managing Inflation and Monetary Policy to create a more stable and prosperous economic future for Europe. By doing so, we can prevent the pitfalls of a "needle in the haystack" approach (see Fabian Wintersberger analysis below) and promote sustainable growth and stability.

Thank you for your attention and consideration.

Appendix

Worth reading: Misesian Austrian economist Wintersberger dissertation on the ECB and Europe

Worth reading entirely https://fwintersberger.substack.com/p/aftermath-february-2025 it is of such quality that we put here section 4.1

4.1. The Beat Goes On

Beyond that, unleashing more government investment—or, put more bluntly, piling on more debt financing—that doesn’t produce real growth will only end up as an inflationary boost. With the ECB still in the late stages of wrestling down an inflation crisis, it’d be risking another wave of price spikes anyway.

So, we need to think about the ECB’s role here. The ECB has started engaging on multiple fronts within the current tangle of economic, geopolitical, and political struggles. The times when the European Central Bank was just an institution focused solely on managing the currency area’s monetary policy are long gone.

Recently, the ECB, in the person of Christine Lagarde, has met with personnel from the EU Commission and other politicians on multiple occasions. That flies entirely in the face of the ideal of an institution free from political influence. I suppose, though, that everyone’s always looking to grab a little more of it within the sphere of power.

Even if you just focus on its monetary policy mandate, the ECB would have plenty on its plate. If you’re a frequent reader of my stuff, you know I’ve criticized their past actions more than once, so I’ll keep this short. After the ECB flooded the market with liquidity in 2020, it totally misjudged the situation, brushing off the rise in inflation as a temporary bump. Then it tried to talk inflation down, which didn’t work and ended up raising interest rates too late, right as Russia invaded Uk