THE BUNDESBANK, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the euro zone that would boost the international competitiveness of countries worst hit by the debt crisis.
A future German inflation rate above the euro zone average could be part of a natural adjustment process as crisis-hit states pulled themselves out of recession, the Bundesbank argued to German parliamentarians yesterday.
It followed comments by finance minister Wolfgang Schäuble backing stronger wage increases, which would boost domestic demand – benefiting other European countries exporting to Germany – but which could drive German inflation higher.
The Bundesbank has for some time seen European Central Bank policy as too loose for Germany. The willingness to contemplate higher domestic inflation in public comments points to a new flexibility in German thinking.
Despite the Bundesbank’s conciliatory stance on inflation, German policy-makers have been among the toughest in insisting Greece sticks to its agreed reform programme underpinning its bailout in the aftermath of Sunday’s Greek election, when most voters rejected the plan.
The Bundesbank rejected “actively” weakening the competitiveness of German firms or loosening fiscal policy in the hope of boosting demand elsewhere in the euro zone, but argued as crisis-hit “periphery” economies restructured, their competitiveness relative to Germany would improve.
“In this scenario, Germany could in the future have an inflation rate somewhat above the average within the European monetary union, although monetary policy will have to ensure inflation overall in the EMU is consistent with the goal of price stability and that inflation expectations remain firmly anchored,” the bank said.
The commentary could help counter fears that Germany’s angst about inflation will restrict policy-makers’ room for manoeuvre in combating the region’s debt woes by, for instance, pushing for the ECB to raise interest rates prematurely.
– Copyright The Financial Times Limited 2012
