With the ECB’s second cheap money flood in three months coursing through European banks and financial markets and the possibility at least of a further interest rate cut in offing, the relief in Europe’s austerity-wracked periphery is palpable. But what of the impact on the relatively buoyant “core” in Germany, the bloc’s largest economy and super-competitive export engine? Darren Williams at money managers Alliance Bernstein reckons German inflation is being cooked up by this super-easy ECB money, coming as it does against a backdrop of relatively brisk German credit growth and house price inflation there of some 5.5% last year which is “positively explosive by German standards”.
This is the flipside of pre-crisis euro zone problem with “one-size-fits-all” monetary policy. Before 2007, sluggish German growth meant ECB policy was kept far too loose for the faster-growing peripheral economies who then generated credit and inflation-fueled booms that boosted real-estate prices, private and public sector debts and eroded competitiveness. Now, monetary policy appropriate to a euro-wide slowdown fueled by the hobbled periphery looks far too too loose for Germany.
However, Williams posits that if Germany can tolerate an effront to its anti-inflation psyche then this move could help rebalance skewed intra-euro current accounts by boosting German domestic demand for the exports of its troubled euro neighbours while curbing the super-competiveness of German exports flooding other euro economies and undermining producers there. That’s not the way many in Germany want the rebalancing to happen clearly. But even the most ardent hawks in Berlin probably now acknowledge that endless austerity and economic contraction in its nearest neighbours or the sort of financial implosion likely from a euro collapse would not be in Germany’s best interests either. So, a little compromise perhaps.
The key of course is the extent to which German wage rises take hold and the following graphic on euro area unit labour costs, thanks to Reuters’ Scott Barber, illustrates the scope for more “convergence” of what has already begun since the onset of the global credit crisis in 2008 — strong rises in German and French labour costs compared with declines or flattening elsewhere. Perhaps the anomaly here is Italy, where labour costs are still behaving like the Franco-German core while its broader economy and debt markets have been signalling the opposite.