It’s been clear for months that inflation in the euro area is accelerating this year, and going up even faster in its largest economy than in most other parts of the currency union. Last month, German prices were 4.6% higher than a year earlier. Now the Bundesbank, Germany’s central bank, has increased its forecast for November to a spike of about 6%.
There was a time when such a projection by what used to be the world’s most hawkish central bank would have caused shock and awe in Germany and financial markets everywhere. “Not all Germans believe in God,” a French former president of the European Commission once remarked, “but they all believe in the Bundesbank.” Specifically, their faith is based on the conviction that the bankers in Frankfurt will do anything to keep prices stable. And a plus of 6% seems far from stable.
These days, of course, the Bundesbank is just one of 19 member institutions of the European Central Bank and can no longer dictate interest rates for an entire continent all by itself. But it still has sway.
That’s why Germany’s many monetary hawks, unhappy about not only low rates but also the ECB’s huge bond-buying programs, have chosen to interpret the premature departure of Jens Weidmann as president of the Bundesbank as a form of protest. He tendered his resignation a month ago amid the increasing dovishness of President Christine Lagarde’s ECB. His gesture certainly falls into a long tradition of German central bankers walking out of the Bundesbank or the ECB with passive-aggressive body language aimed at Europe’s birds of a different feather.
The timing of Weidmann’s exit, announced in October, was awkward. It tossed another bone of contention into the already iffy coalition negotiations between Scholz’s Social Democrats, the environmentalist Greens and the pro-business Free Democrats. The first two parties lean dovish on monetary and fiscal policy, in Germany and the European Union. The third consists of unreformed hawks, at home and in Brussels.So the Free Democrats have their fiscal talons out. They want to restore Germany’s balanced-budget rules, suspended in the pandemic, as soon as possible. They’ll also try to prevent any kind of fiscal integration in the EU they’d regard as a “transfer union.” By that they mean any arrangement in which taxpayer euros flow permanently from frugal countries (like Germany) into the bottomless pits of prodigal member states.
To get the FDP’s ideas through, and to pad his own resume, the party’s boss, Christian Lindner, appears to be pushing hard to become the next finance minister. That wish, however, clashes with ambitions for the same job by Robert Habeck, one of the Greens’ leaders. If that conflict was hard enough, they’ll all now have to argue about a replacement for Weidmann as well.
So there’s a danger that the nuances in the Bundesbank report could get lost in the politicking. The main subtlety is that the current bout of inflation, though intimidating, is still almost certainly a temporary blip. Most economic forecasts agree with that outlook (see chart).
Much of the rise in German prices is due to one-off factors, such as exceptionally low bases in the pandemic’s first year and a temporary lifting of some value-added taxes that are now taking effect again. The energy crunch affecting the whole continent and world plays a role too.
Once these special circumstances disappear again, the Bundesbank reckons, inflation could settle at about 3% in Germany for the foreseeable future. That’s well above the 2% rate targeted by the ECB for the euro area as a whole. But after a long stretch when price rises undershot the goal, it hardly seems inappropriate that the rate in one member state should overshoot for a bit.
Scholz, who’s so far tried to keep a low profile in the coalition talks so as not to alienate the more cantankerous Greens and Free Democrats, would therefore be wise to remind Lindner, in particular, and Germany’s hawks, in general, of two things.
First, he should point out that fiscal and monetary policy should work together, not cancel each other out. One reason why European monetary policy has long had to be so loose — to the chagrin of German conservatives — is that German fiscal policy has been so, well, conservative. Let out those purse strings a little more, and the ECB might not have to keep money so easy, so long, to steer the euro area into a recovery.
Second, Scholz should remind Lindner that Germany is part of a currency union. The Germans can’t expect the ECB, also headquartered in Frankfurt, to pay special homage to statistics in its host country, just as the Bundesbank before 1999 didn’t hold a magnifying glass over inflation only in North-Rhine Westphalia, say.
So while it’s good to be alert about inflation running out of control, the better policy for now — in Berlin, Frankfurt, Brussels and elsewhere — is to keep a lid on that German angst, and carry on.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andreas Kluth is a columnist for Bloomberg Opinion. He was previously editor in chief of Handelsblatt Global and a writer for the Economist. He’s the author of “Hannibal and Me.”
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