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They could also import from non-euro countries; what then?

Under an "economic equilibrium" frame it would go something like this:

Then the Eurozone would no longer be in trade balance as a whole so there would be a downward pressure on the exchange rate. The rest of the Eurozone would benefit from the lower exchange rate, and would increase their exports outside the Eurozone, too. Equilibrium (again balanced trade EZ-wide) would be attained at a lower exchange rate. But now Germany would be running a smaller trade surplus and some of the deficit countries a smaller deficit.

Imports would become more expensive and that would lead to some pain, but also for opportunities for import substitution if because of the lower exchange rate production in the EZ became profitable where it was marginally unprofitable before.

Unfortunately, the ECB would react to the consumer price inflation resulting from the more expensive imports by raising interest rates and nipping in the bud any private-sector attempts at investment for import substitution. And the public sector, as we know, cannot do anything meaningful without running afoul of EU "illegal state aid" rules.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 01:51:03 PM EST
[ Parent ]
It's funny how one does not separate different kinds of inflation from each other (in central bank practice). It's quite absurd to me that the central bank should increase rates to combat inflation which is caused by dearer imports (caused by an oil shock, for example). It's not like it's going to help, is it? Especially not if you're not looking at core inflation, but rather at the CPI!

The reverse should be true as well: don't cut rates and blow bubbles just because you're importing disinflation from China.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Feb 18th, 2012 at 02:32:00 PM EST
[ Parent ]
It's funny how one does not separate different kinds of inflation from each other (in central bank practice).

Central banks like their interest rate management to be based on very very simple rules of thumb.

There is more than one rate of inflation? Wud? <bits of central banker cranium all over the walls>

I think they use deliberately obscure language so as to hide the fact that there isn't much there, there. Also it might explain why they spend all their time admonishing the fiscal authorities on fiscal policy and protesting that nobody else should admonish them on monetary policy.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 02:43:56 PM EST
[ Parent ]
deliberately obscure language so as to hide the fact that there isn't much there

As we say in Sweden: det dunkelt sagda är det dunkelt tänkta, "what is unclearly said is unclearly thought".

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Feb 18th, 2012 at 02:50:59 PM EST
[ Parent ]
You know another funny thing the ECB does? If a government raises VAT, they interpret the resulting price rise as inflation, and raise interest rates.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 02:45:29 PM EST
[ Parent ]
You know another funny thing the ECB does? If a government raises VAT, they interpret the resulting price rise as inflation, and raise interest rates.

Yeah, about as funny as a debt-depression death spiral.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Feb 19th, 2012 at 08:26:20 PM EST
[ Parent ]
Or when the inflation is driven by increased interest rates...

A swedish kind of death:

Riksbanken var oenig om räntebeslutet - Ekot | Sveriges Radio
Förklaringen finns bland annat i högre priser på livsmedel och energi, och i Riksbankens egna räntehöjningar. The explanation [to higher inflation] is partly found in increased prices on food and energy and also in the increased interest rates of the Central Bank.
Men till det kommer ett problem med att effektiviseringen av produktionen sjunkit, att produktiviteten blivit sämre än väntat. Något som i sin tur delvis bottnar i att det är goda tider på arbetsmarknaden med fler jobb och högre löner.But adding to that is the problem that the efficiency increase in production has declined, the productivity is worse then expected. That in turn is related to the good times on the labor market with more jobs and higher salaries.
Det är de problemen som vice riksbankschefen Svante Öberg i redan i december ville stävja med höjd styrränta.These are the problems deputy chairman Svante Öberg already in december wanted to stop by increased interest rate.


Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Sat Feb 18th, 2012 at 03:53:39 PM EST
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