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Thursday, September 27, 2012

Germans vs Inflation: the battle continues

In our daily review of UK and continental press, we spotted an interesting consumer analysis survey referenced on the front page of Bild yesterday. The survey - conducted by Axel Springer AG and the Bauer Media Group - found that Germans were conservative and prudent in terms of their finances with 67.9% of respondents possessing a savings book, 57.2% setting aside a specific sum every month, with only 33.8% having a credit card.

In contrast, in 2010, 64% of the UK’s adult population had a credit card – almost double that of Germany’s. This could possibly help to explain how the German and UK debates on the eurozone pass each other by so often, especially when it comes to the role of the ECB. The view from Berlin is that the ECB ought to remain as the guardian of price stability and not engage in activist monetary policies such as bond-buying, while the view from London, Washington and indeed other European capitals is that Draghi’s recent actions mark a decisive turning point in the crisis, and that it is good that he has been able to overcome German resistance – as argued by David Laws at an Open Europe fringe event at the Lib Dem conference.

Incidentally, former ECB chief economist Otmar Issing has an interview in yesterday’s Die Welt in which he warns against the social and economic damage of unchecked inflation:
“Many people come up to me on the street. Savers are deeply insecure and they have every reason to be. [The ECB’s] monetary policy has reached its limits [it] risks losing its credibility.” 
"There is no immediate risk of inflation. However I have my doubts that the ECB will stop its immense liquidity at the correct time. If this fails, prices will rise. I do not anticipate hyperinflation. However, even an inflation rate of 4 to 5% disposes savers and creates social problems… The social partnership between employers and unions, everything depends on a reliable monetary policy. Inflation is the most anti-social policy.” 
“[Pumping more liquidity into the system] is a dangerous argument. In putting out a fire, it is also the case that more water is not always better per se. Ultimately it could turn out that the damage caused by the water exceeds the actual fire damage.” 
Speaking to the German Industry Federation (BDI) yesterday, ECB President Mario Draghi defended the ECB’s new bond-buying programme, and in an apparent swipe at German fears of inflation, that in times of crisis “we cannot always look to the past for answers”. While Bundesbank chief Jens Weidmann may have been isolated in voting against the OMT programme, he retains the backing of a huge swathe of German public opinion which is deeply rooted in the country’s culture of savings and financial prudence.

This battle is not over by any stretch of the imagination.


Rollo said...

The best thing for Germany is to keep the Euro too low for their exporters: it is bringing them in 18 billion euros per month in trade surplus with the eurozone. So the status quo is fine-until the eurozone cannot afford to buy from Germany.

Bugsy said...

@ Rollo - All very fine for Germany, but the price for their success is the increasing poverty and chaos in the PIIGS and Cyprus. Who will pay to repair the damage caused by increasingly violent protest.

christina Speight said...

Today I read that a 5% inflation would halve our debt burden in 10 years whilst ruining savers.

Already we see savings devalued by miniscule annuity rates.

Jeremy Warner in the Telegraph avers that some form of social collapse is almost inevitable in all the PIIGS countries AND in Britain too. There is no other way out after living the 'life of Riley' on borrowed money.

Germany still has the choice - it can go down the same road or it can pull the plug on the euro and save itself, solvent but on a reduced standard of living.

Rollo said...

I agree with you, Bugsy. The EU is prepared to sacrifice a whole generation of SEuroland, in order to keep their dream alive, and to line their own pockets. If it does not stop, it will lead to war.
Greece needs to be helped out of the Euro, as do Spain, Portugal, Belgium, France, Cyprus, Italy. Ireland would do better adopting Sterling, as any 'independent' Scotland would.

Criterion said...

A set inflation rate across isn't practical as what suits one countru (Germany) won't suit another (Greece) and this is how these problems spiral

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