Tag Archives: deflation risk

The current crisis WAS predicted, deflation risk and all – by German economists

If it proves impossible either to convince the ECB to raise its inflation target or to coordinate wages policy in the EMU countries as described above, then in future Germany’s stagnation and deflation risks are likely to spread increasingly to the other EMU countries. Excessive wage restraint in Germany will not only fuel national economic stagnation but will also put pressure on wages policy in the other EMU countries in the medium term. The fact that inflation in Germany is lower than the EMU average means that price competitiveness of German producers in the European market is constantly increasing. It is true that in recent years, a growing export surpluses have prevented Germany from sliding from economic stagnation into a deep recession. However, it also means rising import surpluses for the other EMU countries, something that cannot be sustained for any length of time owing to the negative effects on income and employment. Since the EMU countries can no longer resort to a currency devaluation, it is inevitable that sooner or later there will be a wages policy response, as witnessed in the Netherlands, where the recent wage bargaining round ended zero wage increase (Schulten/Mühlhaupt 2003). However, if wages policy starts to be widely used to improve price competitiveness, then the threat of deflation will spread accordingly. If this happens, then even a more growth-friendly monetary policy by the ECB might be ineffective.

And when was this written? In 2004!!


“France’s ‘AA’ Hollande pays price for kowtowing to EMU deflation madness – Telegraph Blogs”

“France’s ‘AA’ Hollande pays price for kowtowing to EMU deflation madness – Telegraph Blogs” http://feedly.com/k/HFnWUq

Another fine and important post.