Inflation on its way

I have been writing on the return of inflation politics before (last year when the FED resumed printing money I discussed the topic as well). Now the bail-out package of the European Union, admittedly a bold move that few expected to be as comprehensive and as large in scale, will bring us a step further (The New York Times compares the Euro with the Rubel in 1998). It is not only the bail-out money itself that is worth noting in that context. Much more important is a at first glance less spectacular detail of the deal: the ECB is bowing to political pressure and is going to start buying the junk bonds of states when investors turn their back on them. This might mark the end of central bank independence as foreseen in the Maastricht treaty and insisted on by Germans that were so reluctant to give up their beloved Deutsche Mark. It will also mark the end of stabilization politics as we have seen it before.

For different reasons inflation could be kept remarkably low for years now, but a decisive factor were the rather cautious and hawkish inflation fighting policies of most central banks. This is poised to change now. What the ECB is planning to do is in effect printing new money (as the Bank of England and the FED are already doing). You don't have to study Milton Friedman to guess what that will cause in the not to distant future.

Is the dream of Europe dead?

The times are undoubtedly difficult if not apocalyptic for Europe. The dream of a united Europe is falling apart more quickly than people realize. In the middle of the chaos stands the most controversial issue these days: the common European currency, the Euro (see also my comment on a bailout of Greece from February this year). There is no use of economists who have always seen it coming (and many indeed have) playing the “I told you so” card. We are in this mess and we need to find solutions.

So what is the actual problem? As I see it politicians have either been naïve or have knowingly kept a low profile on the fact that a common currency is much more than having the same coins and bank notes. It means a common faith in many more aspects. Citizens gradually start to realize just that and they don’t seem to like what they got themselves into. As they see it the Euro makes them pay for the mistakes (or profligacy for that matter) of others and they are not really prepared to do that. You may call this a lack of European solidarity, but that is only part of the truth. Some serious policy mistakes have led to a fundamentally wrong public picture of Europe. Disadvantages of European integration were virtually non-existent in people’s minds. The only critical voices were nationalist politicians who usually do not have any arguments other than the value of national sovereignty itself. Although it seems that Europeans turn out to be more inward looking and nationalistic than previously thought, I think that there is more to the apparent reluctance to step in for Greek (and potentially others soon to come) household debts. Citizens were never allowed to consciously choose on whether to be in a union with whole Europe for the good and for the bad. They were told integration will have exclusively positive consequences and were barely ever asked directly anyway. It feels a little bit like being surprised by the small print in a standard contract you never paid attention to. No wonder citizens of countries that are expected to pay for the mess are disinclined and angry to do so.

Feasible solutions are in principle simple because there are only two viable options: much stronger integration close to a political union or disintegration. To avoid the latter solution, Europe needs a much more open dialogue about Europe. Citizens need to understand the pros and cons of a politically and economically fully integrated Europe and then be allowed to make a conscious decision on it. Candy-coating reality will not work anymore or if it does, create future fury. Quite understandably, politicians are trying to fix economic woes right now, but all they do is buying time. Hopefully, they are going to use the time wisely to address those ideological questions on European integration. Only then will a permanent solution of Europe’s existential crisis be conceivable.