Monday, 16 February 2015

Bring back the Deutschmark?

The Eurozone authorities should require Germany to declare openly whether it wants the standard 2% inflation or whether (as seems to be the case) it wants zero inflation and zero deficit.

If it wants the former and the rest of the EZ definitely want the standard 2% target, then Germany should quit using the Euro, and revert to the Deutschmark.

It is absurd to think that one country in a common currency area can achieve zero inflation while others have 2% inflation: all that happens is that the former country grows too competitive relative to the latter countries.

If Germany agrees to the 2% inflation target, then immediate steps should be taken to boost demand in the EZ and bring inflation in Germany back up to the 2% target. (Unfortunately it’s debatable as to whether the authorities in the EZ, just like the authorities in the US or UK,  actually know how to boost demand without getting their knickers in a twist on the subject of deficits, debts, etc. But that’s another matter.)

Alternatively, if Germany definitely wants zero inflation and zero deficits, it can live perfectly happily with other EU countries and trade with them, but it can’t share the same currency. In that case, Germany should revert to the Deutschmark.

As to the popular idea that that would amount to a revaluation of the currency used by Germany, and hence that Germany’s balance of payments would be hit, which would be a problem, that’s nonsense. A freely floating Deutschmark, like any other currency which floats, keeps the relevant country’s external position in balance in the long run. What’s wrong with that? That’s far better than a constant surplus, i.e. a constant accumulation of foreign currency, which is then loaned to irresponsible borrowers who don’t pay the money back.

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