New Bundesbank boss needs to focus on the bigger euro picture


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

agel took over as Bundesbank president at the start of the month. He succeeded Jens Weidmann, who stepped down early after failing to persuade his fellow-members of the ECB Governing Council to pursue the true path of monetary righteousness.

Weidmann may be gone but clearly Nagel too is a true believer. In his first speech as Bundesbank boss he banged hard on the anti-inflationary drum.

“The people of Germany rightly expect the Bundesbank to be a vocal advocate of the [price] stability culture. I can assure you: it will remain so,” he said.

The Covid-fuelled increase in eurozone inflation has served as an excuse for the Bundesbank to wheel out its anti-inflation fetish once again. Eurozone inflation hit 5pc last month, the highest since the single currency came into existence in 1999.

The vast majority of, non-German, economists reckon most if not all of the higher inflation rate is the result of once-off factors including higher energy and food prices along with supply-chain difficulties caused by the re-opening of economies after Covid-19 lockdowns.

Even Nagel himself acknowledged (sort of) these once-off factors before reverting to Bundesbank type.

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

This inflation fetish has blinded the Bundesbank to the damage, both economic and political, that has been wrought on the countries of southern Europe, and 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 hard-right candidates, Marine le Pen and Eric Zemmour, on a combined 30pc of the vote with the various hard-left candidates on about 14pc between them.

In other words, almost half of French voters will cast their ballots for a candidate of either the hard-right or hard-left.

The situation in Italy, which is due to hold a general election by June 2023, is if anything even more disturbing. The two hard-right parties, the Lega Nord and the neo-fascist Brothers of Italy, are each on 19pc while another anti-system party, the Five Star Movement, is on 15pc.

This should come as little surprise. Italy has experienced virtually no economic growth during its near-quarter century euro membership with the single currency ruling out the previous tactic of occasional devaluations to restore its international competitiveness. The Italian unemployment rate is over 9pc, almost 30pc among under-25s. But sure hasn’t Italy got low inflation and a strong currency. Denis Healy, UK Chancellor of the Exchequer in the late 1970s had a word for this: sado-monetarism.

In Spain, where a general election is due before the end of next year, the hard-right Vox party is running at 17pc support in the opinion polls.

Meanwhile, with the euro ruling out the threat of an appreciating currency, Germany has been the big winner from the euro. All of those BMWs, Mercedes, Audis and Volkwagens have never been more affordable.

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

Peter Navarro, who served as trade adviser to the Trump administration, wasn’t far wrong when he accused Germany of using a “grossly undervalued” euro to “exploit” the US and other members of the euro, in 2017.

The available evidence would seem to support him. When the peg between the euro and the Swiss franc snapped in January 2015, the value of the Swiss currency against the euro immediately leaped by 30pc.

If the euro was to disappear then the value of the new German successor currency would similarly soar against those of the other euro successor currencies and the German surplus would quickly vanish along with the single currency as its exports became much more expensive.

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

Don’t be fooled by all of the paraphernalia of the euro. Despite the common banknotes, the single currency is still very much a work in progress. Without a single treasury to assist chronically-depressed peripheral regions such as the Italian Mezzogiorno or Andalusia in Spain, the euro is more a souped-up fixed-exchange rate system, not unlike the old ERM, than a real currency union.

The euro will have to stop faking it if it wants to survive another quarter of a century. The current situation, where Germany has locked in a favourable exchange rate that has allowed its current account to swell to obscene levels but refuses to assist the poorer regions is not sustainable.

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

If the euro falters, Germany will be by far the biggest loser. Nagel needs to focus on the bigger picture rather than pointlessly obsessing about what will almost certainly prove to be no more than a temporary spike in inflation.



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