Democratic control is now ensured through a clear mandate defined by the government for the central bank’s conduct of monetary policy. The political authorities can verify the central bank’s compliance with the mandate without deciding on the use of the instrument. 31  -  The third innovation sprang out of New Zealand. In connection with economic reforms, the authorities introduced fiscal performance targets. They then started searching for good and realistic performance targets for monetary policy. They found that what monetary policy should deliver was stable inflation in the medium term – New Zealand introduced a so-called inflation target for monetary policy. 32  What is the difference between what is referred to as inflation targeting and the former policy of parity? Let me explain the difference using a stylised example. Assume that the price index has been 100 over a longer period. The price level is thus stable. An increase in, say, energy prices then occurs and the index moves up to 105. Energy has become more expensive in relation to other goods. Under the parity system, other prices had to be reduced to move the index back to 100. This could require a substantial decline in output and employment, as was the case in the interwar years. Under an inflation targeting regime, it is in this example accepted that the index remains at 105.
Nonetheless, euro area GDP is expected, at end-2022, to still be somewhat less than 4 pp below the level that would have been observed according to last year’s December projections (the latest before the COVID-19 outbreak). 7  Given the exceptional uncertainty over future pandemic-related developments, this baseline scenario has been accompanied by a more favourably defined alternative scenario. In it, euro area GDP would, at the end of the time horizon considered, be slightly higher than was envisaged in December 2019. Another, more adverse scenario was also laid down, in which the negative gap relative to the 2019 reference would be around 9 pp. Inflation fell in August to - 0.2%, and its core component, which excludes energy and food, stood at a very low level of 0.4%. The ECB’s projections point to a gradual recovery in the coming years. At the end of the projection horizon, inflation would stand at only 1.3%, some distance off our related target. Moreover, several factors tilt the risks to economic growth to the downside: uncertainty over how the pandemic will evolve; the possibility of a no-deal Brexit; and a potentially more adverse reaction by unemployment and in the dynamics of corporate start-ups and company failures once the support measures have run their course. In parallel, there has been a progressive appreciation by the euro in recent months. This introduces disinflationary pressures at a time when the euro area inflation outlook is, as I said, for a record low.