Eurozone Scare Stories

Moneybox
A blog about business and economics.
Dec. 8 2011 2:32 PM

Inflation After A Eurozone Breakup

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Via Brad Plumer comes ING's dire assessment of the consequences of a Eurozone break-up. Their basic point is that this will look ugly for everybody, including Germany, so people need to bite the bullet and keep the Euro enterprise together. Broadly speaking, I think that assessment has merit, but I wonder about this inflation analysis.

You can see why being forced off the Euro and onto a rapidly depreciating currency could cause an uncontrollable burst of inflation in the likes of Spain and Portugal. But why should Germany suffer years-long deflation if they don't want to? An open, trade-dependent economy like Germany should have no problem devaluing its currency to forestall deflation if that's what the Bundesbank wants to do. In a pinch, they could mail envelops jam packed with newly printed marks to random southern european households to make sure they have the hard currency needed to buy German manufactured goods. It's quite true that Germany is the last country in the world that I would actually predict will embark upon large-scale unconventional monetary policy, but that's a political forecast rather than an economic one. The spell of large-scale price declines that ING is predicting in this scenario is something no country should ever undergo against its will.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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