Germany says rates ‘too low’ in deflation-haunted eurozone. Is that crazy or what?

This is pretty unbelievable.

German Finance Minister Wolfgang Schäuble claims interest rates in the euro zone are “too low from a German perspective”, according to a Wall Street Journal report.

“I think we have an interest-rate level that’s too low in the medium term from a German point of view,” he said. “I know that the situation is very different in some other European countries—that is why a common monetary policy isn’t quite so easy in Europe.”

No kidding.

Shauble’s comments show just how differently Germany thinks compared with the rest of the eurozone.

With inflation at less than half of the European Central Bank’s (ECB) medium-term target, an increasing band of experts are clamouring for the central bank to do more in terms of easing monetary policy.

Interest rates are already at a record low in the 18-nation currency bloc, with the main lending rate at 0.25%.

However, inflation and economic activity remain extremely sluggish. The eurozone, in fact, is inches away from tumbling into a deflationary spiral.

Yet the Germans continue to fret about inflation (implied by Schauble’s comments). The last thing the region needs is higher interest rates.

Shauble’s remarks show why any further easing measures by the ECB will be a mighty, uphill battle. Indeed, the ECB’s hands are already effectively tied after Germany mounted a legal challenge to the central bank’s Outright Monetary Transactions programme.

No wonder ECB  President Mario Draghi is hoping that he can simply talk  the the region out of deflation.

I have to admit, the German minister’s anachronistic viewpoint makes me wonder how the eurozone would have fared if Germany were out of the picture completely.

And it seems I’m not the only one. Billionaire investor George Soros on Wednesday told CNBC that Germany should have quit the eurozone to help the most indebted nations in the currency union.

The exit of Europe’s largest economy  would have helped the ‘rebalancing’ of the rest of the region’s economies, offering a “quick fix” to the eurozone’s problems, he added.

However, with Germany’s dominating presence in the currency union, the chances of a ‘rebalancing’ are practically zero now. Europe will likely face a prolonged period of painful readjustment and stagnation, Soros predicted, according to CNBC.

Getting Germany out of the eurozone remains wishful thinking. But the ‘painful readjustment and stagnation’, that’s real.

[Image Credit]


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