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Germany’s marriage to the euro is tearing at the seams by Jeremy Warner for the Telegraph - 01.02.22

Adopting the currency was a kind of penance for two world wars – but many young Germans feel it has suffered enough.

We all know why the Bank of England is planning to further tighten monetary policy on Thursday; with inflation about to surge to something close to 7pc, a rise in Bank Rate to the dizzying heights of 0.5pc is now widely seen as a racing certainty.

It’s also possible that a start will be made on reversing the hundreds of billions spent on quantitative easing.

Less easy to understand is why the European Central Bank won't be following suit.

Eurozone growth is admittedly a little weaker than the UK right now, but the inflationary pressures look much the same. Eurozone inflation in December was 5pc, not much different from the UK's 5.4pc.

In the land of the pathologically inflation averse - Germany - it meanwhile hit 6pc in November, a level which in the past would have holed the presiding government below the water line.

Inflation has fallen back a little since then, but not by as much as expected, and remains by German standards intolerably high.

It's just as well for Olaf Scholz, the German Chancellor, that he is too new in the job to attract the blame.

Nor is Germany the odd one out. The December inflation rate for the Netherlands was 6.4pc, and for Spain it was 6.7pc.

And yet, still clinging to the mantra that the spike in prices is “transitory”, and to the likely delusional belief that inflation will be back to target by the end of the year, the ECB refuses to act.

Further evidence, many will say, of why a “one-size-fits-all monetary policy” doesn't work.

But it's not exactly that, is it? Inflation is way above where it should be more or less everywhere in Europe, and in the Baltics, it's already in double digits.

The ECB may be right that the inflationary pressures will begin to ease from here on.

But to keep the foot virtually flat down on the monetary accelerator even as prices surge to those not seen since the early 1990s looks oddly out of sync with the tightening stance signalled elsewhere by both the US Federal Reserve and the Bank of England.

It might be argued that the ECB’s policy stance is just an admission of the inevitable – that Europe is falling victim to Japanification, or a permanent state of deflationary economic stagnation.

This might be true, but the more accurate way of looking at the ECB's reluctance is that large parts of Europe simply can't afford a significant monetary tightening.

Without persistent support from the ECB as buyer of last resort, the stresses and strains in sovereign bond markets last seen during the eurozone debt crisis a decade ago might soon return.

Today's dilemma over what to do about resurgent inflation raises some of the same issues as were highlighted back then.

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Germany’s marriage to the euro is tearing at the seams - article by Jeremy Warner for the
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German Chancellor Olaf Scholz

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