Germans don’t like inflation. You may recall from your history, that during the pre war years, the country suffered from hyper inflation pushing the economy to its knees, and of course then creating an environment ripe for fascism.
In France, between the wars, just like in the UK, a bigger problem was high unemployment. And these different experiences helped define economics policies during the post war years.
For Germany, it was all about an independent central bank, keeping tight reins on inflation, while in the UK and France it was felt a little bit of inflation was a good thing – a price worth paying to keep unemployment under wraps.
The snag was economic policy had been to a large extent designed by Keynes- a brilliant man, but whose theories were developed in extreme circumstances, the depression. It’s true, that in an environment of low demand, and wasted capacity, it’s a good thing to pump money into the economy, but you can’t keep doing it.
But for much of the post war years that’s what we did, but in the longer term the effect of this was rising inflation and rising unemployment, stagflation. It’s a lesson we may have to learn all over again, as central banks respond to the latest crisis by pumping money in, – again.
In Germany, however, before re-unification the economy benefited hugely from the effect of its policy of maintaining low inflation.
Today, in the eurozone, the argument has re-surfaced. French president, nearly headless Nick Sarkozy, thinks too much emphasis s is placed on inflation. That the European Central Bank (ECB) is too keen to up rates, when inflation remains quite minor. In this regard, he has the backing of much of the French populace, and that’s why we feel that it is quite inaccurate to compare him Mrs Thatcher, a true anti inflation warrior.
But yesterday, news brought this debate into sharp focus, when it emerged that German inflation saw a massive jump in August, rising from 2 per cent to 2.7 per cent – for one month that is an extraordinary jump. To put this in context, the ECB defines price stability as below, but close to 2 per cent. Not only was the Headline inflation (HICP) soaring, but even the index with food, energy and tobacco taken out was sitting at 2 per cent, the highest level for a long time, in fact last October it was just 0.8 per cent
Now, the Germans, won’t like this at all. And the ECB will, as a result be placed under enormous pressure to up rates, leaving Mr Sarkozy, no doubt worrying about the ramifications of the credit crises, seething. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link
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