Saturday, March 08, 2008

The Euro Split

The column in The Economist that is known as Charlemange has an interesting story about how Germany and France are split in the issue of monetary policy. Germany knows from its history that if inflation gets out of control, like it did in 1923, this leads to disaster. They also remember the success of the relatively hard money policy pursued by the Bundesbank in the post-war era. It is therefore hardly surprising that the leading hawk in the ECB board is Axel Weber, a German.

The French by contrast has long traditionally been friendlier to inflation, which is why they now complain that the euro is too strong and call fro ECB interest rate cuts.

Charlemange also note the incoherence of the French attacks on the ECB. While calling for more inflationary policies, Nicolas Sarkozy and other French politicians at the same time express worry about the reduction in domestic purchasing power due to rising inflation. Either these politicians are too stupid to comprehend the link between a higher money supply and higher prices or, which is arguably more likely, the attacks on ECB is simply a way for them to blame France's economic problems on some else.


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