ECB board member Mario Centeno has raised the alarm about deflationary tendencies. Meanwhile, government debt is soaring, and the eurozone economy remains stagnant. The central bank’s stubborn interventionism has led it straight into a trap.
Deflation is the final boss of any central bank operating within a frictional, credit-based monetary system. In a world where money is created at the push of a button through the issuance of debt, falling prices translate into rising real debt burdens.
This holds true for governments, corporations, and households alike. Investments dry up, credit creation halts, and the system destabilizes. Rising prices are the spice that keeps fiat systems alive. They keep insolvent, systemically relevant debtors—chiefly, the state—afloat. It’s a costly illusion that sustains the transfer of wealth from the productive sector to the government.
A Shadow Cast by Deflation
Even a fleeting shadow of deflation seems to have startled the monetary mandarins at the ECB’s Frankfurt Tower. In an interview with the Italian daily La Stampa, Mario Centeno warned of declining inflation rates in the eurozone. What might seem like good news to consumers is perceived as looming disaster by central bankers. In May, annual inflation dropped below the ECB’s target of 2 percent to 1.9 percent—down from 2.6 percent a year earlier.
Policymakers and central bankers alike must confront a fundamental question: Why do we cling to a monetary system that comes with an embedded engine of redistribution?
Falling inflation is a symptom of chronic weakness in the eurozone’s real economy, where the private sector has long been mired in recession. Only massive public debt programs keep the illusion of growth alive.
In the La Stampa interview, Centeno emphasized the need for further monetary stimulus. The interest rate level, he said, must match an economy capable of generating stable 2 percent inflation. That kind of economy, he added, does not currently exist in the eurozone. Translation: credit must be made cheaper. Once again, they hope to fight crisis with a flood of money.
Palpable Helplessness
Central banker interviews usually follow a familiar script. When inflation—caused by their own prior actions—forces them to tighten policy, the resulting recession is spun away with clever rhetoric.
In the subsequent easing cycle, they try to coax commercial banks back into lending. It’s the moment when monetary impotence becomes painfully clear. You can lead the horses to water, but you can’t make them drink. In the eurozone, the trough is overflowing—and the horses are emaciated, disoriented, and unwilling.
This is one of the key reasons the European Central Bank is pushing the introduction of a digital euro. In Frankfurt, officials know full well: under today’s regulatory burdens, demographic realities, and sovereign debt overhang, the private sector’s credit engine can no longer return to the old growth track.
Both the ECB and the EU Commission in Brussels are betting that full control over the core levers of the capital market might help overcome the continent’s structural stagnation. They have learned nothing from the history of centrally planned economies.
A Systemic Dead End
Overcoming structural misjudgments requires character and intellect. In the case of eurozone monetary policy, we must acknowledge what has long been evident: blind faith in a failed monetary regime has crushed all reformist energy. Faithfully following the old playbook, we now get the same remedy: monetary stimulus, lower rates, and massive government spending—Keynesian camouflage for an artificial economy.
Centeno also noted that the interest rate easing cycle would continue and that deflationary effects from U.S. trade policy were being felt. He knows what he’s talking about. Falling prices—the ECB’s declared arch-nemesis—are actually a benefit to consumers and a hallmark of healthy market competition.
But rather than reflect on the ECB’s role in Europe’s malaise, Centeno pointed fingers: blame, naturally, rests with Donald Trump and his tariffs. No mention of Europe’s self-inflicted energy crisis, bureaucratic suffocation, or monetary mismanagement.
One wonders how central banks will respond when monetary accelerants like artificial intelligence or robotics add even more deflationary pressure to the system.
A Short Retrospective
The ECB’s reaction to the COVID lockdowns offers a preview of what’s to come. Under its Pandemic Emergency Purchase Programme (PEPP), the ECB flooded markets with liquidity starting in March 2020. It bought government and corporate bonds to the tune of €1.85 trillion and propped up banks with ultra-cheap refinancing. The result? An explosion of the money supply, which choked off any budding market correction—and sowed the seeds of the ensuing inflation wave.
After the lockdown slump, inflation surged in 2021, driven by monetary expansion, energy shocks, and state interventions. In the eurozone, it peaked above 10 percent. Since then, inflation has fallen steadily, but the descent now has policymakers sweating.
The long period of zero interest rates also zombified the economy. More and more businesses and households took on debt they can no longer refinance as rates rise. Record insolvency rates indicate that the market has begun to cull the weakest players—often the subsidized darlings of the Green Deal, a scheme meant to give euro-Keynesianism a sustainable sheen.
The ECB’s rapid sequence of eight rate cuts in just 12 months is a clear sign of growing desperation. Adjusted for inflation, the ECB’s benchmark rate is already back in negative territory. In this environment, banks can’t earn money—but governments do get some breathing room to avoid the political pain of cutting bloated welfare budgets.
Separating Money and State
We are paying a steep price for having monetary policy effectively in government hands—along with the most dangerous power tool of our time: control over the price of money. The true political power in Europe doesn’t reside in Brussels. It sits in the ECB Tower, where officials decide credit costs, steer capital allocation, and shape resource distribution—at enormous cost to private capital formation.
The fundamental reform needed to escape the Keynesian delusion is the separation of money and state. Governments would then be subject to the disciplining forces of the capital market. It would mark the end of absurd policy ventures like the Green Deal, the covert financing of warfare, and a welfare regime designed primarily to buy votes.
By manipulating the value of money, policymakers have severed the link between spending behavior and real cost. It has become all too easy for governments to distance their fiscal recklessness from the resulting loss of purchasing power—and to scapegoat others for the inflation their own printing presses have caused.
But such radical reforms usually follow deep crises. So let’s temper our hopes. The next chapter in the eurozone saga is already taking shape: former ECB President Mario Draghi’s proposed €800 billion stimulus program to combat recession. Also in play is the debt offensive announced by German Chancellor Friedrich Merz.
In short: Nothing new in the West.
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Thomas Kolbe, born in 1978 in Neuss/ Germany, is a graduate economist. For over 25 years, he has worked as a journalist and media producer for clients from various industries and business associations. As a publicist, he focuses on economic processes and observes geopolitical events from the perspective of the capital markets. His publications follow a philosophy that focuses on the individual and their right to self-determination. Follow him on Twitter/X: https://x.com/ThomKolbe.