If I were Angela Merkel, I’d be running for cover as David Glasner exposes her lack of empathy regarding the plight of southern Europeans while admitting that she leads the ECB around by the nose – in her own words.
I woke up today to read the following on the front page of the Financial Times (“Merkel highlights Eurozone divisions with observations on interest rates”).
“Angela Merkel underlined the gulf at the heart of the eurozone when she waded into interest-rate policy, arguing that, taken in isolation, Germany would need higher rates, in contrast to southern states that are crying out for looser monetary policy.The German chancellor’s highly unusual intervention on Thursday, a week before many economists expect the independent European Central Bank to cut its main interest rate, highlights how the economies of the prosperous north and austerity-hit south remain far apart.”
What could Mrs. Merkel possibly have meant by this remark? Presumably she means that inflation in Germany is higher than she would like it to be, so that her preference would be that the ECB raise its lending rate, thereby tightening monetary policy for the entire Eurozone in order to bring down the German rate of inflation (which is now less than 2 percent under every measure). The question is why did she bother to say this? My guess is that she is trying to make herself look as if she is being solicitous of the poor unfortunates who constitute the rest of the Eurozone, those now suffering from a widening and deepening recession.
Her message is: “Look, if I had my way, I would raise interest rates, forcing an even deeper recession and even more pain on the rest of you moochers. But, tender-hearted softy that I am, I am not going to do that. I will settle for keeping the ECB lending rate at its current level, or maybe, if you bow and scrape enough, I might, just might, allow the ECB to cut the rate by a quarter of a percent. But don’t think for even a minute that I am going to allow the ECB to follow the Fed and the Bank of Japan in adopting any kind of radical, inflationist quantitative easing.”
I just simply do not understand the obsession with prices given supply-side facts of life. There is so much that can go on with prices over which the central bank has very little control. With a ceiling on prices, those price pressures have to go somewhere and it ends up stealthily taken out of the pockets and investments of ordinary people. I just do not see what there is to be gained from it other than a lot of grief, heartache, and laying waste to entire generation or more of Europeans. The devil is always in the opportunity cost, the things which cannot be seen; and I fear that before this is all over, the cost will become even more staggering and mean much more than the value of money.
The crisis in Europe has already gone on longer than I imagined it could; and I don’t understand how the nations in south can bear the human tragedy playing out every day, day in and day out for years with no end, no light at the end of the tunnel without declaring the entire euro project a failure. I pray for them, that they may have the wisdom and courage to take the only way out that there is. It can’t end well if all things remain the same.
And by the way, it was pretty silly of Merkel to allow her mask to slip over such a trivial point as cutting nominal interest rates. Even if the ECB did it tomorrow, nothing will change. Deflation will still ravage the south, there will still be capital flight into Germany and the rest of the northern part of the currency block – and probably more demand for dollars. I certainly hope the Fed has learned the right lessons from the crisis in 2008 to not allow crisis in Europe to further tighten monetary policy here.