Europe Will Not Benefit From Inflation Spike

– “Existing” debt -stock- reduces its value due to inflation, but deficits and interest expenses may rise.

Low prices actually helped to cement the Eurozone recovery after the 2009 crisis. If it were not for low CPI, it would have been much more challenging for families to endure the bubble-led crisis and subsequent real salary decrease and unemployment rise. Anyone who thinks that inflation would have prevented the crisis is ignoring the factors behind the Eurozone recession. The questionable Phillips curve link between CPI and unemployment was debunked decades before.

Of course, the inflationist alchemist is confident that these risks – which they cannot deny – will be canceled-out by the European Central Bank’s monetary policy, which will have to repurchase everything that is issued to prevent real rates from rising alongside inflation.

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When artificially manipulated rates fall below real inflation, credit growth collapses, real productive investment falls, and with it, the velocity of money. In fact, the only investment and credit that is encouraged by this policy is high risk and very short-term oriented to compensate for the difference between reality and manipulated rates.

Families in Europe have managed to reduce their indebtedness admirably in these years. And the vast majority of their wealth is in deposits. If we think that an aging population is going to buy more in real terms because prices rise, we have not learned anything from the evidence of the past. But some will say that this time is different.

The problem with the Eurozone is that it is trying to solve structural problems with any measure except the one that fixes the perverse incentive that perpetuates stagnation. The constant transmission of wealth from the efficient and the saver to the indebted and inefficient.

The EU tries to fix the economy without touching the mechanisms that slow it down. High government spending, low productivity, and poor competitiveness.

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