Photographer: Krisztian Bocsi/Bloomberg

German Pride Shifts to Angst in Role as Europe’s Reflator

  • Inflation surge triggering pushback against ECB policies
  • Monday data show Saxony, Hesse, NRW with price growth above 2%

Germany is feeling cursed by its own economic strength.

For eight years, the nation of 83 million people has been the euro area’s growth driver. Now it’s at the forefront of the currency bloc’s reflation -- early data on Monday showed annual price increases exceeding 2 percent in some states -- and dissatisfaction with the European Central Bank has morphed into frustration.

Critics and media are slamming the institution’s monetary stance -- set to support not just Germany but the entire 19-nation region -- as mainstream parties struggle to contain a surge in populism ahead of national elections. Finance Minister Wolfgang Schaeuble has warned that higher inflation could cause “political problems,” and German monetary officials are urging their peers to start devising an exit strategy from unconventional stimulus.

“It’s a completely overblown discussion,” said Carsten Brzeski, an economist at ING-DiBa AG in Frankfurt. “As long as you have core inflation of around 1 percent in Germany, there really isn’t any reason to worry. You also have to ask yourself ‘can the ECB even react?”’

State-level data published on Monday showed January inflation accelerated to 2.4 percent in Hesse, home to the Frankfurt-based ECB, 2.3 percent in Saxony and 2.1 percent in North Rhine-Westphalia. Brandenburg and Bavaria both reported price gains of 1.7 percent.

European bonds slid. The yield on German 10-year bunds added 3 basis points to 0.49 percent, while that on similar-maturity French securities climbed 7 basis points to 1.10 percent.

National inflation statistics are due at 2 p.m. Another strong reading -- economists predict 2 percent -- would fan a debate questioning the ECB’s policy stance that was fired up after the country’s most-read newspaper Bild responded to last month’s increase with a call to “Raise rates now!”

German Angst

Prominent German economists and politicians are blunt in their warnings that monetary stimulus is going too far, even with inflation primarily driven by energy costs that the ECB can’t control. Germany’s central bankers are nudging their colleagues toward a discussion about how to normalize policy in more subtle tones.

ECB Executive Board member Sabine Lautenschlaeger argued that “all preconditions for a stable rise in inflation exist” and the question of an exit can “soon” be addressed. Bundesbank President Jens Weidmann repeatedly warns of risks related to asset purchases and an overly accommodative stance.

Even though Germany’s aversion to inflation -- rooted in the 1920s, when workers used wheelbarrows to collect their daily pay -- is met with sympathy abroad, the intensity of the discussion has some people spooked.

Spanish Prime Minister Mariano Rajoy expressed concern last week over a premature tightening, given that his nation still has about a fifth of its workforce standing idle.

A slew of data this week will provide an update on growth, inflation and confidence in the euro-area economy.

PeriodSurveyPrior
Mon: Economic ConfidenceJan107.8107.8
Tue: GDP (qoq)4Q0.4%0.3%
Tue: InflationJan1.5%1.1%
Tue: UnemploymentDec9.8%9.8%

Any improvements in the region’s data will also be a reflection of Germany’s economic dominance. The country has driven the recovery since the 2008 financial meltdown and mitigated the double-dip recession in 2012 and 2013 following the debt crisis. But with faster growth comes faster inflation. 

Mathematical Equation

“You have periphery states with very low inflation because capacity isn’t fully utilized there, and Germany, where a higher capacity utilization results in a stronger upward trend of prices,” said Stefan Kipar, an economist at Bayerische Landesbank in Munich. “It’s a mathematical equation -- even when the ECB reaches its goal of inflation just below 2 percent on average, some countries will have lower rates while others will overshoot.”

ECB President Mario Draghi has tried to assuage German concerns, arguing the continued support of the euro-area economy with low interest rates and asset purchases is in the country’s interest, and inflation is far from spiraling out of control. 

His argument is that underlying price pressures are still weak. German companies are only partially passing on higher costs to clients, and consumers haven’t noticed a significant pickup in inflation. Wage growth has remained subdued despite above-potential growth over the past three years and a decline in unemployment to a record low.

“Wages in Germany have been growing moderately in past years, but that hasn’t led to any significant upward pressure on German core inflation, and I don’t really see that changing this year,” said Andreas Rees, an economist at UniCredit Bank AG in Frankfurt. “I don’t really see any big inflation risks.”

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