German price statistics and the ECB Council decision on the same day – it couldn’t be more symbolic in these times of inflation. In October consumer prices rose by 4.5 percent compared to the same month last year, after 4.1 percent in September. The trend is stable upwards in Germany and Europe.
But ECB boss Christine Lagarde once again shrugs her shoulders a little disoriented – and the German inflation warnings once again have a good reason to hyperventilate.
Yes, Germany is particularly sensitive to inflation, and the worry is sometimes hysterical. But now even the pigeons in the Governing Council can hardly deny that the inflation panorama in the western industrialized countries has fundamentally changed – whether there are base effects or pandemic-related catch-up effects.
The Frankfurt central bankers are finding it increasingly difficult to maintain their hitherto soothing stance. The fact that renowned economists are now campaigning against the German culture of stability does not necessarily help calm the situation.
The American Nobel Prize winner Joseph Stiglitz is not too bad to be involved in the debate about German ministerial offices and to start a somewhat unsavory campaign against FDP leader Christian Lindner. This polarizes and prevents the clear and sober view of inflation developments, which is so necessary in these times.
Weidmann’s resignation creates suspicion
The fact that Bundesbank boss Jens Weidmann is announcing his retirement now, of all times, when everyone feels that regulatory principles are shaken by the pandemic at the latest, creates suspicion. Because Weidmann was one of those central bankers who over the years has best managed to balance the need to rescue the euro and keep a critical distance from the ECB.
In the end, he was only worn down – in view of the countless unsuccessful warnings not to overburden the ECB. Not to instrumentalize the central bank as the savior of banks, state budgets, entire economies or, in the end, even the climate.
In the struggle for stability orientation, in the struggle to keep moderation, the Bundesbank President leaves a large gap that can hardly be imagined larger.
The financial crisis, the euro crisis and, above all, the pandemic have pushed the ECB’s total assets to well over eight trillion euros. When it was founded more than two decades ago, it was just 700 million euros. Lagarde’s predecessor, Mario Draghi, was always able to counter the doubting Germans: What do you actually want, inflation rates are low, prices in Europe are more stable than in the D-Mark era. Draghi was right.
Saving is not an option: inflation, which miraculously disappeared for a decade and a half, has returned to the industrialized world in 2021.
Lagarde, however, can no longer put forward this argument. Indeed, there are good reasons that the current trend will continue over the long term. An acute shortage of skilled workers due to the aging of society, growing protectionism that is turning off the decades-long inflation hammers globalization, and generally the politically intended jumps in energy prices in the fight against climate change – there are enough structural inflation risks.
Yes, the central banks could still take countermeasures in good time. The instruments are there: This applies to the overdue reduction in monthly bond purchases and, above all, to the classic monetary policy instrument, the key interest rate. But will the ECB be able to act decisively? There are reasonable doubts.
In the meantime, two technical terms have even become established that explain well why the central banks may not act decisively enough. On the one hand, there is “fiscal dominance”. The term means that the central bankers are under pressure to show consideration for those finance ministers who may no longer be able to refinance their debts if capital market interest rates rise in the long term. With a view to the southern European countries, this trend already existed during the euro crisis.
The pandemic has dramatically exacerbated the problem of government debt ratios well beyond 100 percent. Last year, the ECB had already financed the entire budget deficits of the euro countries with its bond purchases. As a result, the money supply M3 rose at double-digit rates at times.
People have a keen sense of price developments
The “financial dominance” should not be neglected either. The markets have become so used to the free money that a quick weaning would inevitably lead to a crash and economic damage as a result.
Ergo: Since the ECB can only slowly reduce its extremely expansionary monetary policy in order to at least keep the undesirable side effects in check, it should start as early as possible.
Economic history has shown that people have a keen sense of how prices develop. Trade unions negotiate wages on the basis of such expectations, banks use them to calculate their loan agreements. If people expect prices to continue to rise, they will end up rising too. Inflation feeds inflation.
That is why it is so important that central bankers keep inflation expectations under control. At the moment it doesn’t look as if they will succeed – and there is some evidence that 2021 will go down in financial history as the year in which inflation, which miraculously disappeared for a decade and a half, returned to the industrialized world .
More: Inflation in Germany has risen to its highest level since October 1993