Arnold Kling drew up a list of four things he’d like to know about Europe’s financial crisis. The second item stuck out:
What does the option for inflating away European debt look like? How would the cost of that inflation be distributed? Can the inflation take place within the context of the euro, or does it require that some countries leave the euro?
Yeah, I’d like to know the answer to that one, too, especially as it might provide some kind of guidance for what might happen in this country. Remember, debtors love inflation — and there’s no bigger debtor, anywhere, ever, than the government of the United States of America.
But back to Europe. More specifically, back to Frankfurt, home of the European Central Bank. As the price for giving up the Deutschmark, Berlin insisted that “the primary objective of the ECB is to maintain price stability within the Eurozone, or in other words to keep inflation low.” Germany has nothing but bad memories of inflation, and wasn’t about to let French or Italian profligacy bring back Weimar.
Then the PIIGS shuffled up to the trough, and made France’s and Italy’s appetites seem Teutonically modest in comparison.
All of which is a long way of saying, sure, there probably is some chance that the ECB might monetize away the eurozone’s debts — but not so long as it’s still headquartered in Frankfurt. Germany would — indeed, must — leave the euro before letting more than a half-century of work and thrift be destroyed by spendthrift foreigners.
And without its German core, runaway inflation in the eurozone might become all but inevitable.
UPDATE: When ten trillion dollars pays off half the national debt, or buys a pair of shoes, who gives a good got-dam about the interest on the re-fi?