The ECB keeps printing money as German inflation soars

Transferring taxpayer cash from Germany to southern Europe under the EU Recovery Fund is controversial and could prove politically toxic.  The European Central Bank is heading for a major political showdown with the German people as inflation surges towards 4pc, calling into question the fundamental contract of monetary union.

The ECB defied mounting criticism at its policy meeting on Thursday and offered no clear guidance on bond tapering or future monetary discipline. It vowed to press on with its pandemic asset purchase scheme (PEPP) at a “significantly higher pace” than earlier this year. Bond purchases are running at more than €100bn a month.

Christine Lagarde, the ECB’s president, said it was “too early” to discuss any reduction in the torrid pace of quantitative easing, but acknowledged “divergences” within the governing council - a central bank euphemism for a confrontation.

The continued stimulus comes even though the eurozone economy is in the early stages of an accelerating boom, and even though the ECB raised its growth forecast for this year from 4.1pc to 4.6pc.

It also comes despite greater fiscal largesse than originally expected. Eurozone budget deficits will balloon to near 9pc of GDP this year, rising to 12pc in Italy where Mario Draghi is pursuing a variant of New Deal Bidenomics.

The reflation fire will be further stoked over coming months by the first set of grants from the EU’s Recovery Fund, likely to be more heavily "front-loaded" in several countries than presumed earlier.

Emergency monetary stimulus in this context is becoming hard to justify. The ECB’s former chief economist, Jürgen Stark, says his former alma mater has succumbed to naked “fiscal dominance” and is engaged in a disguised bailout of insolvent states, operating a de facto transfer union without democratic assent.  

The clash is likely to come to a head over coming months as Germany regains its pre-pandemic levels of GDP long before the "Club Med" bloc. 

The full text can be accessed at: German inflation

Relevant discussions to have with your class

Explain why the ECBs €100bn a month Bond purchases have placed inflationary pressures on Germany?

Explain the likely long term impact of current deficit levels in the Eurozone?

Why might 'grants from the EU’s Recovery Fund' be unpopular with German voters?