Krugman Wins?

Peter Coy, writing for Bloomberg’s Business Week:

The Financial Times reports today that Germany’s central bank, the Deutsche Bundesbank, “has signaled it would accept higher inflation in Germany.” The newspaper story says this would be “part of an economic rebalancing in the euro zone that would boost the international competitiveness of countries worst hit by the region’s debt crisis.”

Coy finds this move obvious:

If the euro area is going to hang together over the long run, you have to undo those competitiveness gaps that have been created,” says Schoenholtz. The peripheral countries need to lower their prices relative to Germany’s. If Germany had very low inflation, those countries would require outright deflation, which is extremely painful. If Germany accepts somewhat higher inflation, primarily via more generous wages to workers, the rest of Europe can have a low but still positive inflation rate.

Says Schoenholtz: “To anybody who’s a monetary economist, this isn’t news.”

Of course it’s definitely news to anyone who has been listening to Trichet, Merkel, etc.

It’s not good news to people with a lot of money tied up in money – as opposed to people with money tied up in other stuff. Of course Keynes (and Krugman) would say that those are exactly the people who needed to be prodded to get up and buy something, whether cars, villas, or factories.

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