Abstract
In the non-academic sector in Germany, it is often advocated that the expansion of the ECB’s money supply would inevitably lead to high inflation or even hyperinflation. This paper explores the question of whether inflation could arise in the euro zone, if so how high it would be and whether it would be hyperinflation. The work is based on theoretical considerations on the subject of hyperinflation and inflation and outlines a possible scenario in which the latter could actually become a reality. The thesis is that the greatest danger to the euro zone would come if Italy and / or Spain chose to leave the Union. Covid-19 has increased the risk of divergent economic developments in different countries in the euro zone. Italy and Spain have to reckon with a dramatic increase in public debt, weak growth and deteriorating conditions on the labour market. The main risk is unlikely to be that the euro zone will not help Italy or Spain, but the people in these countries may feel that aid is not enough, thus making an exit a serious option. If these countries left the Eurozone, then they would likely opt for an orderly exit. That means Italy would join EMS II after a one-time devaluation and not leave the EU. If the exit was not negotiated, then a disorderly parting would commence, which is the scenario with a high risk of hyperinflation.
Highlights
Since the turn of the millennium, there have been significantly less adherents to the quantity theory
In Germany, some economists still expect high inflation or even hyperinflation1 to result from the strong expansion of the money supply of the ECB, the FED and other major central banks
Examples of authors from the non-academic field are Krall (2017) and Homm et al (2016). Both denounce the monetary policy of the ECB after the financial crisis and see the high national debt as the reason for an emerging hyperinflation
Summary
Since the turn of the millennium, there have been significantly less adherents to the quantity theory. In Germany, some economists still expect high inflation or even hyperinflation to result from the strong expansion of the money supply of the ECB, the FED and other major central banks. Examples of authors from the non-academic field are Krall (2017) and Homm et al (2016) Both denounce the monetary policy of the ECB after the financial crisis and see the high national debt as the reason for an emerging hyperinflation. According to Rieck (2011), in contrast to Krall and Homm, inflation does not automatically result from more money. He has suggested that constant increases in the central bank’s money supply act like a drug. In addition to demographic reasons, Fuest cites the unequal distribution of income, the increased purchases of government bonds by the central banks and the weakness in investments due to the falling potential output as reasons for the low interest rates and high bond prices
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