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In reality, it is a moot point whether the ECB would allow Germaninflation to run to 4 per cent. Germany is considered the anchor ofthe monetary union. Many at the ECB (and not just those fromGermany and core countries closely aligned with it) believe thathigher inflation in Germany would constitute a loss of pricestability, threatening the credibility of the euro. ECB memberswill also be aware of the threat that higher German inflation couldpose to the legitimacy of the euro in Germany. The Germangovernment won over sceptical Germans to the euro by promising thatthe ECB would deliver the same degree of ‘price stability' asthe Bundesbank. The Bundesbank and the German government wouldresent much higher German inflation. A sharp rise in German priceswould almost certainly harden German opposition to other reforms ofeurozone governance, not least any form of debt mutualisation. But assuming the ECB does treat Germany like any other eurozoneeconomy, what would happen? Germany could try to tighten fiscalpolicy further in an attempt to offset the very weak monetarystance. But it is unlikely to be any more successful than theSpanish or the Irish were in nullifying the impact ofinappropriately loose monetary policy. Negative real interest ratesin Germany would stimulate economic activity in Germany, increasethe demand for labour and push-up wages. Higher German prices andwages would help facilitate the necessary adjustments in pricecompetitiveness between the eurozone economies: the peripheralcountries would be able to reduce their wage costs relative toGerman ones without having to cut nominal wages. German costs wouldrise relative to the rest of the currency union, removing one ofthe obstacles to a return to economic growth (and debtsustainability) across the south of the eurozone. This is howadjustment takes place within a currency union, and was how Germanymanaged to engineer such a large real depreciation (or‘internal' devaluation) in the first place - against abackdrop of robust inflation elsewhere in the currency union. Anyattempt to permanently lock-in the competitiveness gains willsimply perpetuate the crisis. In a welcome intervention, the German finance minister, WolfgangSchaüble, recently argued that German wages should rise morequickly than in the other eurozone economies as this would help theneeded rebalancing within the eurozone. But such a recognition hasyet to permeate official thinking as a whole, and has not reallyreached the Bundesbank. There are signs that the Bundesbank acceptsthat German inflation will need to exceed the eurozone average, butcertainly no acknowlegement that the differential needs to be verysubstantial. The Germans are proud of the ‘competitiveness'eked out within the eurozone. Indeed, they continue to argue thatevery other member-state can pursue the same strategy as them. Germany faces a difficult choice: either it accepts higherinflation and risks the German electorate's confidence in the euro,or it paves the way for a wave of defaults culminating in either afully-fledged transfer union or the collapse of the euro. We are high quality suppliers, our products such as China Wire Payoff Machinery , Cable Extrusion Line Manufacturer for oversee buyer. To know more, please visits Wire Drawing Machine.
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