Friday, March 30, 2012

Germany Stiffs the ECB

I previously made the case that the Eurozone and Germany need to part ways.  Now it appears Germany is effectively doing that by setting up a separate monetary zone inside the Eurozone.  Here is Ambrose Evans-Pritchard (my bold):
The authorities in Berlin and Frankfurt are worried that the ECB’s 1pc interest rates are too low for conditions in Germany, where unemployment has fallen to its lowest in 20 years.  The ECB’s €1 trillion (£834bn) blitz of three-year loans to banks has started to reignite monetary growth in Germany, even though the key aggregates are still collapsing in southern Europe...
The German authorities are in effect preparing a form of quasi-monetary tightening to offset ECB largesse.
Is this the beginning of the end for the Eurozone?

P.S. Here is the real problem ailing the Eurozone.
P.P.S. Here is my BBC interview on the Eurozone and Germany.


  1. Amazing! In previous posts, David, you have blamed the boom in the periphery on ECB monetary policy that you claim was made to suit Germany, but now that ECB policy apparently does not suit Germany and the Germans do something about it, demonstrating that there is in fact plenty of scope to tackle national booms independently of ECB policy, you criticise the Germans for that. Do you have a prejudice against the Germans like Martin Wolf appears to do?

    And by the way, as I commented on your previous post, there is little chance that Germany and the eurozone could "part ways". I won't repeat that comment here, but will add for your consideration the fact that in 1993, the French proposed to ask the Germans to leave the ERM, but were told by the Dutch and the Belgians that if that happened, they would follow the deutschmark. The eurozone is centred on Germany because the other countries like it like that (actually the Germans were cajoled into giving up the deutschmark).

  2. Great posts of late.

    I have often wondered how a "one size fits all" monetary policy can apply to all of Europe.

    For example, in the last two years Greece should have 1) gotten its fiscal house into order and 2) printed a lot of money.

    It appears it will be able to do neither.

    How about a Global Central Bank? And what should be the monetary policy of a Global Central Bank with China close to overheating and the USA in perma-gloom?

  3. That's completely right. Piigs are on the verge of collapse (not only economic). in EZ fiscal & (or) monetary policy is impossible. InSpain, banks are broken, but fiscal consolidation make impossible both to save banks and economic growth. Probably unemployment rate will be 26% at the end of 2012, thanks to the policy dictated from Bruxelles (Germany).

  4. IMHO, RebelEconomist is right here. Assuming that the ECB sets monetary policy to target overall Eurozone inflation (or NGDP), contractionary policy in Germany will have expansionary effects in peripheral countries.

    Yes, some folks state that fiscal expansion in Germany would help other countries through the exports channel, by boosting overall AD in the Eurozone; however, they're neglecting the plausibility of offsetting policy choices by the ECB.