German inflation obsession will keep euro strong
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To paraphrase the old saying about the key to a restaurant’s success, Germany’s top priority in maintaining a strong currency is inflation, inflation, inflation.
It is commonplace to say that Germany as a nation was traumatized by the hyperinflation of the 1920s, when it took literally a wheelbarrow full of paper money to buy a loaf of bread, and it is as true now as it has ever been.
So even though there may be a global currency war brewing, a German-dominated euro zone won’t be a party to deliberately devaluing the joint European currency, whether openly as suggested last week by French President François Hollande, or under the cover of a domestic battle against deflation, as with Japan’s new government.
Because of its single-minded obsession, a strong currency is for Germany the necessary bulwark against imported inflation. Likewise, a tight monetary policy is an essential hedge against inflation taking root.
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