by Andreas Hoffmann
This is good news for inflationists.
I am shocked that Jürgen Stark quit his job at the European Central Bank. Usually it is a good thing when central bankers quit their job – or at least it does not make a difference. But Jürgen Stark is known as an inflation hawk. Jürgen Stark – like the Mark writes Die Welt.
In my opinion, the main difference between the ECB and the Fed is that the ECB has people like Stark. Unfortunately, there are only a few.
He is opposed to cheap money policies. A while ago, he openly warned of rolling bubbles caused by too low interest rates in the media. Thus, he suggested a timely turn-around in interest rate policy. Recently he voted against further bond purchases of the ECB. More on this recent event can be found here.
Coming shortly after Axel Weber resigned due to his disagreement with Trichet’s policies, Europe’s anti-inflation block is now shattered. Something terrible must be going on at the ECB. I wonder where the ECB is heading?
ThinkMarkets 
I agree this is big, and ties in with your prior post.
There is pushback within Germany on the bailouts. What price will Germans pay to save the euro? Or the EU itsef? For some, it appears the price is too high.
Merkel’s coalition is cracking. Will she govern with the socialists and accept EU-wide inflation?
Merkel recently said that she favors a further economic integration. She did not say transfers. As often she can be interpreted in many ways. I do not think she would dismiss the project all together.
The social democrats and greens are in favor of transfers and euro bonds. The public is not. Perhaps the free democrats use this chance to regain some credibility. But this would not help too much. The coalition might simply break up.
Obviously a monetary union with members so different needs fiscal transfers or very strict enforcable fiscal rules so that fiscal transfers are not possible. Otherwise, monetary policy is simply good for some but bad for others. At least some country’s now adopted debt limits. But not all. And nobody knows whether the people in these countries will allow spending cuts or protest them away.
I hope, in the end, they do not come to the conclusion that rules are impossible. If so, I think the euro will be a huge economic loss for Germany. Then my hopes rest with the speculators to tear this thing apart.
Andreas,
Are EU countries truly “so different?” To be more precies, are they more different than, say, Alaska, California, Mississippi, New York, Texas and Utah?
Even if they are more different, is it the lack of fiscal union or the inflexibility of labor markets? The US has no fiscal union. States can spend and issue debt without any overall limits.
Just asking.
Jerry,
I believe the labor market is less flexible because there are different countries, languages and so on. It is not as easy to move. I wish it was not so.
And does not debt in one State influence the interest rate for the other States?
Actually, I think it was Krugman who once compared Nevada to Ireland. Both depend on exports to neighboring countries or states.
But if Nevada is in crisis, people will move as there is no language barrier. Also, the US has a federal budget which would support pension payments and health insurance and linder the pain of Nevada
All of this is not the case in e.g. Ireland. People do not move – maybe to Britain – due to cultural barriers. And there is no (automatic) European budget for things like this. Therefore, Ireland has to cut pension payments and so on.
Perhaps another main problem is that the euro is by large a political project. Integration went on faster than what people could cope with. So there is no acceptance of costs in crisis for other countries due to a lack of EU identity. This is why all this talk about who profits more and who less is going on in Europe.
I never heard this talk in the US about the monetary policy of the Fed.
Stark’s departure is the top story in the Weekend Journal.
I take the point on language, though it clearly is of no importance for the Irish. The Irish in fact have been highly mobile for almost 200 years. They move and are emigrating in great numbers as I write this.
My experience is that all professionals in the Western Europe speak English, and it is often the default language. Almost 20 years ago I was recruited by UBS for a position in Zurich. I was told that English was the global langauge, used in directors’ meetings, etc. Learning high German would have been a waste of time. The locals spoke Swiss German.
States and localities are
To contine, states and localities are on their own for pensiosn and health care. There are transfers, but federal mandates create a net burden. That is the soruce of the fiscal crises in the states and localities. Medicaid is a big issue.
Jerry,
okay. Then it is mainly the labor market inflexibility – for whatever reasons.
Besides this you suggest that the differences are exagerated. Indeed I think the US is not an OCA either. I wrote about this in a previous post on one-size-fits-all monetary policy.
Yes. Have you read Steil and Hinds on monetary sovereignty? They have no use of OCA.
I have to look this up.
I am not arguing against the euro or dollar in general. Even though I find OCA interesting to have a look why there are problems, OCA is only one argument for or against the introduction of a common currency.
Now Mundell proposes a global currency. So he must believe benefits are much greater than possible problems with labor markets that he pointed at in the 60s. In the 70s he made a turn with the argument of shared risk via capital markets could replace labor market flexibility to some extent.
I generally like the idea of the common currency for another reason. One great thing about it is that independent countries cannot influence its value and use it in politics. But this does not answer how to do it.
I simply fear continous bail-outs and monetization of debt. And if this is what follows from the euro, I am against it.