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Is german policy the greatest Eurozone threat?


In a recent article published in the Financial Times, Jürgen Stark, a former member of the ECB’s executive board, brings the anti-inflation paranoia that the German establishment has accustomed us to since the start of the crisis to a whole new level. In his commentary, he rebuts the need for a more expansionary monetary policy for the monetary union and states that “there are no signs of deflation at the eurozone level”, thus concluding that “no further action by the ECB is required”.

Stark concedes that inflation has been low in the eurozone since late 2013, but asserts that this has been driven solely by “by falling energy and commodity prices, the fading impact of past tax rises in some countries, the appreciation of the euro and relative price adjustments in countries such as Greece, Ireland and Portugal”. Regrettably, he forgets to mention that low inflation (or outright deflation in some countries) is largely a result of the hyper-restrictive and demand-crushing recessionary fiscal policies imposed on European countries – and especially those of the periphery – since the start of the crisis, and now crystallized and institutionalized ad infinitum through the Fiscal Compact.

The IMF’s mea culpa on the recessionary effects of the so-called fiscal multiplier should have shed any lingering doubts about this. Stark acknowledges the deflationary effects of the “relative price adjustments in countries such as Greece, Ireland and Portugal”, but implies that this is a good thing – “benign disinflation” he calls it. The “morality play” underpinning Stark’s assumption is that the huge intra-euro trade imbalances that emerged following the creation of the monetary union are the sole responsibility of the countries of the periphery – which supposedly “lived beyond their means” by letting their wages rise to excessive (inflationary) levels – and that they should thus be the ones to shoulder the burden of readjustment by pursuing internal wage devaluation.

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