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Divergence in debt burdens is now the central political fact of eurozone economic management

 A cartel of mostly Latin debtors has in effect seized control of the ECB in alliance with academic New Keynesian economists, and is pushing through loose-money policies chiefly in its own interest, regardless of German needs and sensitivities.

This cartel is violating the founding contract of Europe’s monetary union: that the ECB would be a hard-money replica of the Bundesbank, and that German people would not be swapping their beloved D-Mark for a lira. A lira is what they may get.

France’s Emmanuel Macron and Italy’s Mario Draghi are now trying to push the envelope even further, signing the bilateral Quirinale Treaty in Rome last month in a bid to take control of Europe’s fiscal regime as well.

Italy is the lynchpin of what unfolds over the next two years. “It is too big to be bailed out by fiscal transfers, and it cannot roll over its outstanding debts unless the ECB is there to keep the market open. The market will shut the moment that the ECB steps away,” said Professor Mayer, now at the Center for Financial Studies in Frankfurt.

Germany faced this level of inflation during the Reunification boom of the early 1990s. The Bundesbank crushed it by raising rates 500 basis points to 8.75pc, and in the process blasted sterling out of the Exchange Rate Mechanism

This time the ECB is persisting with negative rates even as Germany hits full employment and full capacity, and even as the ECB’s own staff union demands a 5pc pay rise.

With apposite timing, German fund manager Count Georg von Wallwitz has just published “Die Grosse Inflation” - no translation needed - a forensic exploration of events from the end of the First World War to Wiemar’s hyperinflation in 1923.

Ambrose Evans-Pritchard Telegraph 30 December 2021


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