Germany's inflation angst eases, makes it easier for Merkel to offer Greece debt relief
By Birgit Jennen
When Walter Baltes was five years old, he thought money came in bundles of banknotes. His grandmother carried them in her arms to the bakery to pay for bread. It was 1923, in the German town of Witten.
“I am very careful with money, which probably has something to do with the inflation experience,” Baltes, 95, said in a phone interview. Yet those days aren’t coming back, he says. “We will never experience this kind of inflation again. I absolutely don’t see any risk of inflation.”
Ninety years after a generation’s savings were wiped out, the German preoccupation with inflation is giving way. A Hamburg University study published by the Bundesbank shows that any anxiety that inflation will erode savings is concentrated among senior citizens, the unemployed and those on lower incomes. The majority surveyed anticipate inflation at about 2 percent in the coming 12 months.
Polls now reveal that inflation concerns have been supplanted by the consequences of deleveraging from the euro area’s debt crisis. A growing number of young people don’t even know what the word “inflation” means, according to the BdB banking lobby in Berlin.
“Our studies show the Germans have no particular fear of inflation,” Rolf Buerkl, a researcher for Nuremberg-based GfK SE, which produces data on consumer purchasing behavior, said by phone. Whereas Germans’ traditional sensitivity about the risk of soaring prices was fanned during the introduction of euro cash in 2002, “those fears have ultimately not been realized.”
Diminishing inflation angst is evidence of an increasing German normalization almost 70 years after World War II. It’s a trend that has accelerated under Angela Merkel’s chancellorship as she oversaw the country’s ascendancy to the fore of European policy making during the debt crisis.
Removing the prime driving force dictating German postwar economic policy might let Merkel look beyond a focus on price stability after her Sept. 22 election victory with the widest margin since reunification. Germany may also exert less anti- inflation pressure on the European Central Bank and be more generous to fellow Europeans.
“It makes it easier for Merkel to agree to debt relief for Greece and gives her more room on the question of banks’ legacy debts,” said Sebastian Dullien, an economics professor and a senior fellow at the European Council of Foreign Relations. It also allows Merkel “greater scope in European policy.”
The hyperinflation that peaked in 1923, brought on by the end of convertibility to gold and post-World-War-I reparations, is often invoked by historians as one of the causes for Adolf Hitler’s rise to power. While the world economy slowed in 1920 and 1921, inflation weakened the mark, boosting exports and reducing unemployment to about 1.8 percent in 1921.
At its height in November 1923, though, one dollar was worth 4.2 trillion marks. Money’s value was falling so rapidly, according to the Bundesbank’s website, that wages were being paid daily.
“People collected notes in bags and suitcases and crowded into shops to exchange their money for goods as quickly as possible,” the article said. Merchants were constantly increasing their prices. “Many began to sell goods and services only in exchange for food and coal; others closed their businesses altogether.”
The Bundesbank, the first central bank to be given full independence, has embraced the lessons of the past. Unlike central banks such as the Bank of England and the Federal Reserve, it isn’t officially responsible for maintaining the stability of the financial system and isn’t a lender of last resort. Its prime responsibility, according to the founding act from 1957, is to safeguard price stability.
That philosophy also became the underpinning for the ECB when it took over monetary policy for the euro countries in January 1999. Concerned with the credibility of the new common currency and pushed by Germany, the architects of the Maastricht Treaty followed the Bundesbank model. They not only set out the independence of the ECB but dictated that stable prices would be the primary objective.
The bank describes its goal as keeping inflation for the euro region close to but below 2 percent in the medium term. The ECB forecasts inflation will hold well under this target through 2015. The central bank this month predicted inflation of 1.1 percent in 2014 and 1.3 percent in 2015 as President Mario Draghi reiterated his pledge to keep borrowing costs low “for an extended period of time.”
Draghi also has promised to do “whatever it takes” within the central bank´s mandate to preserve the euro. His pledge to use unconventional ECB measures includes an unlimited bond- buying program that was opposed by the Bundesbank.
Germans reflect his view. A study of Internet searches published Sept. 1 by Google Inc.’s Google Trends German unit found that queries between January and August 2013 about “inflation” were down by 27 percent compared with the same period in 2009. Searches for “rent,” “gasoline prices” and “taxes” were among those on the rise.
Still, a November European Commission study pegs the percentage of people worried about strong inflation at 13.3 percent and those concerned about moderate inflation at 43.6 percent. Those levels are about as high as they were when the euro was introduced at the start of 1999.
The difference now is that Germans are no more frightened than other Europeans. The same study showed German inflation anxiety was slightly less than in the U.K., France or Austria, and only slightly higher than in Finland.
“It’s very doubtful that after four generations Germans’ fear of inflation is more pronounced than in our neighbor countries,” said Bert Ruerup, former chairman of Merkel’s “wise men” council of economic advisers “Germans are well educated and there is widespread awareness that hyperinflation was closely linked to a lost war.”
Ruerup is president of the Handelsblatt research institute, which researched inflation preoccupations in Germany on the basis of data from polling institute Forsa. The survey asked German private investors with more than 50,000 euros ($69,185) in savings about their price expectations. Sixty-one percent said the rate would remain largely at the present level.
Germany’s historic obsession with price increases is stoked by multiple references in the media and by politicians. The Bild newspaper, Germany’s biggest-selling, ran a front-page story on Aug. 14 about a “supermarket price explosion” under the headline: “Inflation Danger!”
“The topic is exaggerated in German public life,” said Marcel Fratzscher, president of the DIW economic institute in Berlin. “The level of private savings has risen surprisingly, and that points to inflation fears being not so great.”
Dullien sees the cause for diminishing inflation fears in growth of personal wealth. Nominal wages increased by 1.3 percent in the third quarter of 2013, compared with the same period a year ago, according to the national statistical office. With the introduction of a nationwide minimum wage of 8.50 euros agreed by the grand coalition of Merkel’s CDU/CSU and the Social Democrats, he expects inflation worries to continue to decline.
Baltes says he is well able to support himself on his modest, though stable pension. He finds it difficult to understand the carelessness with which the younger generation spends its money. His son bought a sports car for 90,000 euros, for instance.
“He isn’t afraid of inflation,” Baltes said. And Baltes doesn’t know anyone who is.