The ECB barks and bites! It raised rates (“bit”) this week as it had indicated it would do (“barked”) despite economic weakness all over the place. Oh! Yes, headline inflation is a bit over the limit, mostly due to commodity prices. But everyone knows Germany frightens easily on that score.
The countries that were “bit” will have to “mend” their “wounds” by themselves, mostly by deflating, instead of rising wages in Germany doing most of the “healing”.
Below is the graph for unit labor costs in a group of countries. Note that ULC did not rise only in the periphery, but also in large counties like France as well as in small countries like the Netherlands, both outside the “periphery”.
So it´s not just a question of “competiveness” – a very imprecise concept – but maybe more importantly, a question of the wide gap between savings and investment in Germany, which is the factor determining its current account surplus. The figure below contrasts the saving investment balance of Germany and France.
What transpires is quite illogical. On the one hand, Germany believes its customers should “keep buying”, but stop “irresponsible borrowing”! It simply cannot be done. On the other, the ECB is “making policy” only for Germany, at the same time making it harder for it to “sell”.