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Thursday, May 10, 2012

Is the Bundesbank going soft?

Shock horror. According to Reuters Deutschland, an unnamed central banker close to Bundesbank President Jens Weidmann today said the following, in response to the wide rumours that the Bundesbank may be willing to accept higher inflation to help solve the eurozone crisis:
“By this it is meant [that with] a rate of inflation that is moderately above the target of the ECB which is just under 2 per cent...No one need be afraid of massive currency devaluation”. 
 Apparently, the belief is that the Bundesbank 'can live with' 2.5% or 2.6% inflation.  

This follows an interview with German Finance Minister Wolfgang Schäuble,  published by Focus over the weekend, in which he said thus:
“It is fine if German wages are currently increasing more sharply than in all other EU countries”. 
After many years of reforms, he said, Germany has done its homework and can afford higher collective wage settlements than other countries.

So is this a sign that Germany is starting to follow the advice of a whole host of Anglo-Saxon commentators who see higher inflation in Germany as vital if the euro is to survive? 

We wouldn't bet on it. When commentators talk about higher inflation, they have something much higher than 2.5% in mind (though some commentators may not realise that themselves) - this certainly doesn't seem high enough to encourage the re-balancing and evening-out of competitiveness which many believe the eurozone needs to survive in the long term. The media may be getting ahead of itself on this one.

4 comments:

Rik said...

The ECBs mandate is for the whole EZ not for a certain country. As Germany goes much better than the rest it is likely that when the EZ inflation overall is slightly below 2% it will be higher in Germany. The 2.5-2.6% is probably a good indication.

This doesnot mean that there won't be discussions on that in Germany. They already have started one, reading the news papers. Meaning that most likely a political process will be started with an uncertain outcome. But also one that might have consequences for future rescue attempts/bail outs etc. This is not only a Central Bank call, in Germany the population is pretty anti-inflation so it is simply a political issue as well. (And it is mainly about perceived inflation not about the figures economists come up with).

As you say this is about 2.5 or 2.6% nowhere near enough to correct the differences. Percentages needed for a substantial correction are much higher and will get the BuBa and ECB people very likely lynched in Germany. Basically you donot close 30-40% and more gaps with 1% more inflation per year.

Anyway presenting that as the cure that will solve all is imho plain stupid. You need new investments in the Southern PIIGS mainly export oriented. Meaning you will have to compete with the rest of the world for that.
I donot see that happening:
- they have hardly products that are interesting for the worldmarkets;
- no sales/marketing apparatus in place to sell them;
- much more expensive than the direct competition in Eastern Europe (and worse educated)not even to mention China and India;
- loony unions;
- high taxes;
- mass corruption;
- totally over the top labor protection;
- inefficient government and a lot of other red tape.
Simply is a horrible picture. They missed the opportunity to stay ahead of China/India and Co and now these are moving forward and rapidly and they are stagnating.

The problem is that the Southern PIIGS are simply totally uncompetive on a worldscale and not just within the EZ. So you won't solve their problem by only correcting that (you might even make the whole EZ weaker when you do that the wrong way (like the way earlier proposed by Lagarde).

Steve said...

"Bundesbank’s Weidmann Hits Back at FT Report, Sueddeutsche Says" at http://www.bloomberg.com/news/2012-05-10/bundesbank-s-weidmann-hits-back-at-ft-report-sueddeutsche-says.html

Open Europe blog team said...

Thanks Steve - that didn't take long!

Steve said...

Sueddeutsche's article: http://www.sueddeutsche.de/wirtschaft/debatte-ueber-steigende-inflation-bundesbank-behaelt-die-ruestung-an-1.1354306