Germany’s chancellor, Angela Merkel, this week made a “surprisingly strong” attack on the quantitative easing (QE) programmes of the US Federal Reserve, the Bank of England and the European Central Bank (ECB), says Bertrand Benoit in The FT. Merkel fears that loose monetary policy could lead to long-term inflation and sow the seeds of future crises. “We must return to independent and sensible monetary policies, otherwise we will be back where we are now in ten years’ time”, she said.
She has good reason to be scared, says Wolfgang Munchau, also in The FT. She presides over one of the world’s “sickest banking sectors”. German economic growth will shrink by some 5%-6% this year and her country is likely to have to foot 25% of the bill for the ECB’s agreed purchase of e60bn of covered bonds. Until now, Merkel has championed the ‘chacun pour soi’ approach, but faced with the prospect of global inflation, she is now telling the world she is open to global macroeconomic policy co-ordination. “I guess the most likely scenario now is for a period of damaging transatlantic policy divergence.”
Merkel is making a reasonable point, which is being “swept under the carpet in policymakers’ desperation to find a workable path back to growth”, says Jeremy Warner in The Independent. Germany’s past experience of hyperinflation makes it “suspicious of anything that smacks of printing money”. Rigid adherence to the principles of sound money have served it well since the war.
But in Britain, debate centres not around whether QE is inflationary, but whether it is having any effect. The Bank of England will be tempted to “keep applying the medicine until there are signs of life”, but if QE turns out to have a large time lag, we may find ourselves in the midst of an inflationary mini-boom next year with “cripplingly high unemployment to boot. Merkel’s analysis may turn out to be correct. Rarely has the policy dilemma looked more daunting.”