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The End of Free Money

Surging inflation across the European Union should be a clear signal to policymakers and central bankers that the time to stop financing public-debt binges was yesterday. Most likely, the continent is heading into a period of stubborn inflation that will be familiar to anyone who lived through the 1970s.

MUNICH – Although the US Federal Reserve is now thinking about tapering its monthly asset purchases in light of increasing inflation figures, European Central Bank President Christine Lagarde continues to insist that no sustained inflation risk exists. The currently measured inflation, she says, is a temporary problem that will disappear once supply bottlenecks are overcome, so the ECB will not be changing its policies. It is like a coachman who refuses to tighten the reins when his horses are bolting, because they will eventually tire themselves out.

Never mind that, according to the Treaty of Maastricht, the ECB is obliged to ensure price stability under all circumstances. There is no provision for the possibility of letting prices run hot for a while. And, unlike the Fed, the ECB cannot legally seek to balance the goal of price stability with other monetary-policy objectives.

The current supply bottlenecks owe much to the quarantine measures in ports – particularly, but not exclusively, in China. Arriving ships cannot unload their cargo and therefore also cannot be loaded with the intermediate products that Europe’s economy must be able to supply to its customers. Freight rates for international maritime transport have increased eightfold since 2019. But the bottlenecks also reflect the domestically imposed lockdowns in European economies last winter and spring, which led to shortages even of local timber and other building materials produced in Europe.

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