Afternoon Must-Read: Paul Krugman: The German Inflation Undershoot: The European Outlier
:
The German Inflation Undershoot: The European Outlier:
“The point is a simple but important one…
…at this point any European imbalances associated with the surge in capital flows to the periphery after the formation of the euro have been worked off via extremely painful and costly disinflation…. From 1999 to the present, most of Europe has had cost growth and inflation just about consistent with the ECB’s long-standing just-under-2 percent inflation target. There’s just one big outlier…. The European imbalance problem is a German problem, caused by Germany’s persistent failure to have wage and price increases in line with what the euro requires. This German undervaluation is in turn exporting deflation to the rest of Europe. By contrast, France, Spain, and even Italy have been playing by the rules.