|Germany in the euro union.|
Germany out of the euro union.
Indeed, commentators of all stripes say this import-price inflation will be passed on to the German consumers and result in euro inflation likely towards the end of the first quarter 2011.
How does euro inflation in Germany affect the Euro-Crisis in the preipheral economies?
Well, it’s not good: The Germans—famously—have a phobia to inflation, so any indication that it is rising in the eurozone will have the Germans pushing the European Central Bank to raise interest rates.
This could be disastrous to the PIIGS. Higher interest rates in the eurozone would mean higher costs of borrowing, exacerbating the debt crisis they have, while at the same time creating deflationary pressures in the peripheral countries. These deflationary pressures would result in further contractions, further unemployment, rising deficits, further crisis.
This is another example of why the euro as a common currency is such a dreadful scheme: German efforts to curb inflation will result in deflationary pressures in the periphery, likely breaking them.
The sensible solution, of course, would be allow inflation in the euro to creep along to 8% or so—but that is politically impossible in Germany.
So here’s a Fearless Predition:
The Hourly G is predicting that, because of German inflation fears, euro interest rates will rise come the spring, strengthening the euro—but triggering the next sovereign crisis come March-April of this year.
Update, 8:23am, 1/26/11:
Reader Alex From France doesn’t dispute the Fearless Prediction—only the timing of it. The Hourly G sees his point—so we’re updating the next euro-sovereign crisis to between March and June.