As a rule, Paul Krugman does not have a very high opinion of Germans and their way of dealing with money. It is crazy to worry about inflation in Europe now, said the Nobel Prize winner from New York in an interview with South German. The higher rate of inflation is a temporary phenomenon. Krugman’s statement was thoroughly prescient. A few days later, the Federal Statistical Office published its estimate for inflation in July. It turned out to be unexpectedly high and suitable to arouse old fears in Germany, in the spirit of Krugman. “Inflation shock” was the title of the magazine picture-Newspaper.
First the numbers: In July, inflation rose to 3.8 percent – the highest value in 25 years and more than experts had expected. In the course of the year, inflation could even reach five percent, believes the President of the Bundesbank, Jens Weidmann. There are three main reasons for this: First, the reduction in VAT has expired. It was introduced in July 2020 to support the economy. Now the old rates of 19 and 7 percent apply again, which of course is reflected in the statistics. Second, energy has become more expensive because the price of crude oil is rising and because CO₂ has been subject to a levy. Third, there are delivery bottlenecks, for example with microprocessors. As Krugman said, these are all transitory phenomena. In the coming year, inflation will fall back to two percent, predicts the Munich Ifo Institute. No economist is therefore calling for the European Central Bank (ECB) to tighten the euro because of the new figures.
So much for the economic side of the problem. But there is also a social and a socio-psychological side. For the first time in ten years, collectively agreed wages will rise more slowly than consumer prices in 2021, according to the union-affiliated Institute for Economic and Social Sciences (WSI) in Düsseldorf. For employees, who can expect wages to rise by 1.6 percent, this means a real loss of purchasing power. The service union Verdi has already called for wage increases. It is unacceptable “that many employers try to pass their crisis-related or self-inflicted problems on to employees by lowering wages and that employees should accept a loss of purchasing power”. If the unions succeed in doing so, inflation could solidify, as the experience of the 1970s shows.
Inflation is discussed more nervously in Germany than in the USA, for example
And then there is German history and its consequences for the stability culture of the Federal Republic. One can argue about how much the trauma of hyperinflation of 1923, when millions of Germans lost their savings, is really still in the collective memory. Krugman rightly points out that Hitler came to power in 1933 after deflation, the catastrophic drop in prices and thus the exact opposite of inflation. The post-war period certainly plays a role in the memory, the experience that a stable currency stood at the beginning of the path to democracy and prosperity. On July 1, 1990, when the D-Mark was introduced in the GDR, the East Germans learned what it means to have real money.
According to these experiences, the European monetary union and the introduction of the euro could only be enforced in Germany because the ECB adopted the German culture of stability. Their official mandate is to ensure price stability – and nothing else. A clear difference to the American Federal Reserve, which according to its mandate should strive for “maximum employment, stable prices and moderate long-term interest rates”. One consequence of the German culture of stability is the debt brake in the Basic Law, which since 2011 has obliged the federal and state governments to balance their budgets in normal times.
The discussion about inflation in Germany is therefore different and more nervous than in Great Britain or the United States, for example, where inflation rose to 5.4 percent in June. President Joe Biden does not care about these numbers, but rather expects the American economy to grow out of the crisis. In order to be able to finance its huge investment program, the state should take on massive new debt, the deficit will rise to 16 percent of the gross domestic product this year (Germany: 7.5 percent). There are individual critics who fear that Biden could do too much of a good thing and set an inflationary spiral in motion. The financial markets do not share this fear, however. Investors relentlessly buy American government bonds even though they lose a lot of money at an interest rate of 1.25 percent. German government bonds even have a negative interest rate of 0.45 percent and are still in demand.
If the markets were afraid that inflation would settle in, the results would be very different.