War of words in Davos over Eurozone’s inflation/deflation

The logo of the World Economic Forum (WEF) in Davos, on a pane. (EC Audiovisual Services, 22/01/2014).

The logo of the World Economic Forum (WEF) in Davos, on a pane. (EC Audiovisual Services, 22/01/2014).

During the last two days, Friday and Saturday, of this year’s Davos gathering of the rich and powerful, an intense debate about Eurozone’s inflation or rather deflation, divided once again the Old Continent between Germans and…anti-Germans. Ollie Rehn, the Finn European Commission Vice-President and Commissioner responsible for finance and the euro, said that the currently very low inflation rate in euro area at 0.8%, poses severe problems to growth.

He clarified that Eurozone needs a bit more inflation, closely to 2% in order to facilitate the resumption of economic activities. This was enough for the German Federal minister of finance to start a war. Wolfgang Schäuble, while in Davos, replied that this is nonsense and added that if this is Rehn’s opinion as Commission member appointed by Finland, the German government totally opposes this absurd allegation, as it termed it. Obviously Schäuble is very happy with such a low inflation rate, a position held only by Germany though.

Rehn is not alone

Unfortunately for Schäuble, Rehn is not alone in this. Last Saturday, the final day of the 2014 Davos Forum Christine Lagarde, the General Manager of International Monetary Fund, also pointed out that Eurozone’s inflation at 0.8% is way below the European Central Bank’s target set at 2%. She stressed that such a low inflation rate in Eurozone is threatening the global economy and termed it as a “new risk”. She also commented that this may lead to deflation and falling prices, a major threat to all economic values and growth. This is not the first time that the head of IMF strongly criticises Eurozone’s policies.

Not by chance Mario Draghi, the President of ECB, had also a lot to say about euro area inflation rate. Speaking at the same Davos conference as Lagarde, he said that Eurozone inflation is “subdued, and expected to remain subdued for about two years”. In this way Draghi took one more step nearer to the anti-German camp, coming closer to those who think that Eurozone needs a bit more inflation, despite the fact that his position as central banker requires impartiality. It seems that deflation is such a real threat for the euro area and the world, that Draghi couldn’t remain silent. He added “The longer it stays at a low level, the more serious risk of deflation”. He also considered that a persistently low inflation rate is a major impediment to growth.

An immoderate German

Coming back to the German minister of Finance, once again he is losing the sense of proportion and over-reacts, like last December, when he ‘ordered’ the European Parliament, to endorse a Berlin inspired plan for the European Banking Union. Now he openly accused Rehn for brinkmanship, when he said that Rehn acts not as a Commissioner, but as candidate in the next European election. He even went as far as to say, that “Rehn says nonsense while fighting an electoral campaign”.

It must be noted at this point that Rehn eyes a candidature for the Presidency of the European Parliament, as a head of the ALDE party, the alliance of liberals and democrats for Europe. ALDE is to choose its candidate for the Parliament’s presidency next month. Schäuble’s political party, the German Christian Democratic Union (CDU), belongs to the currently largest EU Parliament group the European People’s Party‎ (EPP).

Risk of falling prices

The controversy about Eurozone’s austere economic policies, which lead to low inflation or probably negative inflation (deflation) and falling prices, is not new. For quite some time the major economic powers outside Europe accuse Germany as the responsible party for this policy, which doesn’t help any other country to grow, than Germany.

Last Wednesday the European Sting writer Maria Milouv reported: “In the latest issue of its World Economic Outlook (WEO), which was published yesterday, the IMF raises the tone of criticism against Europe. It’s again the risk of deflation and the projection that “economic slack will remain high”, the two axes which constitute the cutting edge of criticism of North America against Eurozone. The latest WEO also notes that the contribution of exports to euro area’s weak growth will increase, while internal “demand will be held back”. This assessment will give substance for more grievances from the US against Germany. Washington accuses Berlin and other surplus euro area countries, that through their increased exports they ‘steal’ the growth potential from their Eurozone peers and the rest of the world”.

This assessment is shared by almost everybody else outside Germany, including the EU Commission, IMF, the US and French governments and a large number of medium and small Eurozone countries. The reality is though that Germany is the principal financial power supporting the Eurozone countries in distress and this fact gives Berlin the right to dictate policies. This is the way it is.

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