Further to our note on Germany, below, here is another via the FT and Paul Kurgan that highlights just how bad it is going to get for the so called peripheral countries.
The chart shows unit labour costs — with the red line being Germany, the black line France, the blue line Southern Europe and the green line, the European Central Bank’s 2 per cent inflation target.
And here’s the issue, as interpreted by Paul Krugman:
The point is that the introduction of the euro led to a period of low interest rates in southern Europe, triggering an inflationary boom; when the boom ended, they were left uncompetitive with northern Europe. And the ECB is in effect demanding that all the removal of that competitiveness gap take place via deflation in the south, none of it through inflation in Germany.
It kind of places all that criticism about the ECB rate hike announced last week in context. It’s not so much that the ECB is moving ahead of the Federal Reserve (really, this was always likely) but that it’s siding with ze core eurozone countries, so to speak, at the expense of its more peripheral members.
Ironically, should the interest rate rise lead to more deflation in Southern Europe, and more painful deleveraging that could undermine its debt sustainability, then it’s countries like Germany that will be on the hook.
Now for us it really depends on your view, but aside from the political posturing, very little has changed in the euro zone.
Put simply, the politicians are more interested in getting re-elected than fixing the problems.
Treating the symptoms- not the cause.
