meIt was the first time in a long time that economic policy had been discussed in front of an audience in the ballroom of Frankfurt’s Goethe University: the former director of the Ifo Institute in Munich, Hans-Werner Sinn, and the former chairman of the Economic Advisory Council and Freiburg professor Lars Feld, recently personal economic adviser to Finance Minister Christian Lindner (FDP), discussed the sharp rise in inflation on Tuesday night and people’s concerns about how it could all continue. The Center for Financial Studies (CFS) and the Frankfurt Institute for Banking and Financial History had invited.
“Inflation is there and will continue to be,” emphasized Sinn, who last year published a book “The Wonderful Rise of Money: Public Debt, Negative Interest Rates, Inflation”: “The ECB has to react, but it is resisting.”
At 7.3 percent in March, inflation in Germany was even higher than the high levels seen after German unification, Sinn stressed. In the eurozone as a whole it is already 7.5 percent, in the United States almost 8 percent. Among the euro countries, Germany is only in the middle: the Spanish have almost 10 percent inflation, the Dutch almost 12 percent.
All of this understates the situation, Sinn said. You can see that in producer prices. It just takes time for that to reach the final consumer from the initial stages. Trade producer price inflation in Germany is now at 25.9 percent, which is the highest value since the existence of the Federal Republic. In France there are 22, in Austria 24, in Spain 36 and in Italy almost 42 percent. For comparison: Even with the oil price shock in the 1970s, producer price inflation in Germany was only 14.6 percent.
situation of “stagflation”
It’s all serious, Sinn said, speaking of a “new stagflation”: A situation in which there is a lot of demand, but in which companies are unable to create the necessary supply. High energy prices are just one expression of some of these supply-side bottlenecks. Sinn also pointed to the increase in the money supply due to the Eurosystem’s bond purchases and the consequent reduction in public debt: “All debt is inflationary, in a stagflation situation,” he said, and also included the expected additional spending on defense in germany
The economist recalled the extreme inflation of the 1920s as a danger, without wanting to forecast a similar development. However, Sinn even quoted Stefan Zweig: “Nothing has made the German people more prepared for Hitler than inflation.”
Much agreement from Lars Feld
Lars Feld signaled his approval of many of the positions expressed by Sinn: “I share these statements almost completely.” There are differences mainly in the assessment of the role of the money supply and in terms of the gloomy prospects, for example regarding budgetary policy.
The “forward-looking Hans-Werner Sinn” had already pointed out the dangers of inflation at its Christmas 2020 conference, Feld said. The increase in energy prices is actually an “expression of excess demand”. The argument that the ECB cannot do anything about high energy prices is wrong: interest rate policy has an impact on the exchange rate, for example: “The devaluation of the euro creates additional inflationary pressure due to high import prices.
Feld suggested: At its next meeting, the ECB could definitely announce interest rate hikes for the fall, such as setting the negative deposit rate for banks to zero.
The hearing stemmed from the question of whether Germany’s ECB chief Isabel Schnabel should not really resign if she misjudged the temporary nature of inflation, as Sinn had suggested. But Feld didn’t want his former colleague from the Council of Experts to sit down. He was appalled by the “Bild” newspaper’s description of Schnabel and ECB President Christine Lagarde “making us poor and themselves rich.” This is completely misleading. Rather, he himself is under the impression that Schnabel now supports central bank governors in the Governing Council who are committed to tightening monetary policy: “Resigning would be counterproductive.”