In my macro look forward at 2017 “My-forecast-of-the-big-events-and-macro-trends-for-the-year-ahead-the-12-most-dangerous-months-of-2017/” I flagged the lose/lose decision facing the European Central Bank in the year ahead.
The bank’s current policy of 80 billion euros a month in asset purchases is intended to keep low interest rates ultra low in order to weaken the euro, add to inflation, and boost growth in a EuroZone that is still struggling to escape the doldrums.
At least most economies are struggling.
The exception–and the problem–is Germany, where an export-driven economy is showing big gains in global sales from the weak euro. And where inflation is getting very close to the European Central Bank’s 2% target.
Data released yesterday by Eurostat show inflation in the EuroZone as a whole growing at just 1.1% year-over-year. That’s actually good news since it’s the first year-over-year inflation rate over 1% since September 2013. You can look at this number and say that the European Central Bank’s program of quantitative easing is working. Finally.
But inflation isn’t 1.1% in Germany. It’s 1.7% in the latest reading.
And that is reviving German fears that central bank policy is inevitably headed toward run away inflation. Which has, in turn, revived German pressure on the European Central Bank to taper its asset purchases more quickly than the bank announced back in December. Then the bank announced that it would continue asset purchases at the 80 billion euros a month rate through March 2017 and then cut purchases to 60 billion euros a month through December 2017. That decision cut the purchasing rate effective in April but extended the life of the asset purchase plan beyond its planned March termination.
So today we’re getting pressure from Germany on the bank to taper more quickly. “For the saver, the combination of rising inflation and zero rates is a dramatic destruction of the value of their money,” said Wolfgang Steiger, head of the economic council of Chancellor Angela Merkel’s Christian Democratic Union. “It is all the more urgent that the race towards ever more unconventional central bank actions is finally stopped.” The evocation of Germany’s traumatic experience with hyper-inflation in the 1920s is completely intentional. And it pushes a big hot button in German politics in an election year.
Just what the euro and the EuroZone need right now: A fight between the core supporter of economic union on one side, and the European Central Bank and many of the other countries that use the euro on the other.