The new Bundesbank boss must focus on the euro as a whole


The ECB must turn a deaf ear to warnings from new Bundesbank boss Joachim Nagel about the imaginary dangers of a temporary spike in inflation.

agel took over the presidency of the Bundesbank earlier this month. He succeeded Jens Weidmann, who resigned early after failing to convince fellow ECB Governing Council members to pursue the true course of monetary justice.

Weidmann may be gone, but Nagel is also a true believer. In his first speech as head of the Bundesbank, he banged the anti-inflationary drum loudly.

“The German people rightly expect the Bundesbank to vigorously defend the [price] culture of stability. I can assure you it will stay that way,” he said.

The rise in Eurozone inflation fueled by Covid served as an excuse for the Bundesbank to once again release its anti-inflationary fetish. Eurozone inflation hit 5% last month, the highest since the creation of the single currency in 1999.

The vast majority of non-German economists believe that most if not all of the higher inflation rate is the result of one-off factors, including rising energy and food prices as well as supply chain difficulties. supply caused by the reopening of economies after Covid -19 lockdowns.

Even Nagel himself (sort of) acknowledged these one-off factors before returning to the Bundesbank guy.

“It is true that high inflation rates can be attributed to special effects that expire automatically. But not quite,” he said. “I see a danger that inflation could stay high for longer than expected.”

This inflation fetish has blinded the Bundesbank to the damage, both economic and political, that has been done to southern European countries, not just Greece, by 23 years of euro membership.

French voters go to the polls on April 10 in the first round of voting to elect a new president. Opinion polls show the two far-right candidates, Marine le Pen and Eric Zemmour, on a combined 30% of the vote with the various far-left candidates on around 14% between them.

In other words, nearly half of French voters will vote for a far-right or far-left candidate.

The situation in Italy, which is due to hold general elections by June 2023, is even more worrying. The two far-right parties, the Lega Nord and the neo-fascist Brothers of Italy, are each on 19% while another anti-system party, the Five Star Movement, is on 15%.

This should be a little surprise. Italy experienced virtually no economic growth during its membership of the euro for nearly a quarter of a century, with the single currency ruling out the previous tactic of occasional devaluations to restore its international competitiveness. The Italian unemployment rate is above 9%, almost 30% among those under 25 years old. But Italy certainly does not have low inflation and a strong currency. Denis Healy, UK Chancellor of the Exchequer in the late 1970s, had a word for it: sado-monetarism.

In Spain, where general elections are due to be held before the end of next year, the far-right Vox party has 17% support in opinion polls.

Meanwhile, with the euro ruling out the threat of currency appreciation, Germany was the big winner from the euro. All those BMWs, Mercedes, Audis and Volkswagens have never been so affordable.

Germany’s current account surplus has been consistently above 6% of GDP since 2011, by far the highest in the world. By comparison, China’s current account surplus is less than 2% of GDP.

Peter Navarro, who served as a trade adviser to the Trump administration, was not wrong when he accused Germany of using a ‘grossly undervalued’ euro to ‘exploit’ the US and others members of the euro, in 2017.

The available evidence seems to support this. When the peg between the euro and the Swiss franc broke in January 2015, the value of the Swiss currency against the euro immediately jumped 30 percent.

If the euro were to disappear, the value of the new German currency would soar in the same way compared to those of the other currencies which succeed the euro and the German surplus would quickly disappear with the single currency, its exports becoming much more expensive.

And these people have the nerve to lecture us about the supposed evils of inflation.

Don’t be fooled by all the paraphernalia of the euro. Despite common banknotes, the single currency is still a work in progress. Without a single treasury to help chronically depressed peripheral regions like the Italian Mezzogiorno or Andalusia in Spain, the euro is more a bloated fixed exchange rate system, much like the old ERM, than a true monetary union. .

The euro will have to stop pretending if it wants to survive another quarter of a century. The current situation, where Germany has locked in a favorable exchange rate that has allowed its current account to swell to obscene levels but refuses to help poorer regions is unsustainable.

Far from seeking to reduce inflation, Germany should do the exact opposite and let its prices rise to a level that allows other countries in the euro zone to compete with it on fairer terms and reduce its current account surplus.

If the euro weakens, Germany will be by far the biggest loser. Nagel needs to focus on the big picture rather than unnecessarily obsess over what will almost certainly turn out to be nothing more than a temporary spike in inflation.


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