Thursday

17th Oct 2019

German bank breaks anti-inflation taboo

  • Bundles of euro banknotes at the central bank in Germany (Photo: bundesbank.de)

In a marked shift from its age-old taboo of accepting higher inflation, the German Bundesbank on Wednesday (10 May) said it may tolerate a devaluation of the common currency to help out crisis-hit countries suffering under a strong euro.

Jens Ulbrich - who heads the economics department for Germany's central bank - told a public hearing in Berlin that it would hurt to weaken his country's powerful export model and to loosen its national financial policies just to help other countries.

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He added however, that as "periphery" countries face economic restructuring - decreasing labour costs and making it easier for employers to hire and fire - Germany might have to live with a higher inflation rate.

"In this scenario, Germany is likely to have above average inflation rates in the future," he said.

Echoing comments made by European Central Bank chief Mario Draghi last week, the German banker added that euro states should create a "real fiscal union" in which countries hand over a portion of their sovereignty on fiscal matters to a European body.

Since the beginning of the crisis, the Bundesbank has been the most wary of any sort of inflationary policies and consistently opposed interventions by the European Central Bank, such as the €1 trillion in cheap bank loans that helped bring down Italy and Spain's borrowing costs.

The International Monetary Fund on Tuesday joined a chorus of economists calling for Germany to spend more and allow for higher wages so as to shrink the big gap that exists between the southern, crisis-hit euro countries and the economic powerhouse of Europe.

German finance minister Wolfgang Schauble last week also suggested a shift in the low-wage-to-keep-strong-exports policy, saying German workers should have wage increases. "

If anyone deserves a pay rise, it is the Germans," he joked.

IMF tells Germany to do more for eurozone

Germany's economy is doing well in its recovery, but the country should be more "active" in helping the rest of the eurozone cope with the crisis, the International Monetary Fund has said.

ECB considers printing more money

The European Central Bank over the next months will consider various options of 'quantitative easing' - also known as money printing - to counter the risk of deflation.

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