While Heiner Flassbeck commented on Wolfgang Münchau yesterday, I have written a letter to the Financial Times in London on a related topic:

“Sir, Wolfgang Münchau (“Europe’s drifters wait but inflation never comes”, June 9) debunks the European Central Bank’s recent easing measures for what they really are: a farcical move designed to please the markets, without however doing anything to lift inflation from its dangerously low level. And at that Mario Draghi has proved to be an able magician once again.

Indicating that the ECB may not be done yet, he has left the markets guessing about any wonders still to come. Lucky for him the mood is such that only few seem to ponder whether the ECB’s wonder weapons might really be sufficient to counter the “lowflation” threat, and how.

Mr Münchau refers to quantitative easing as the supposed means to “boost inflation directly”. How can he be so sure about that?

The driving force behind the eurozone’s disinflation process is wage repression – exercised to a brutal degree across the currency union. In fact, wage repression – joined by fiscal austerity – is the eurozone’s official policy meant to resolve the euro crisis; even if it is euphemisms such as structural reform of labour markets and welfare systems that usually make the headlines instead.

With wages in übercompetitive Germany creeping up at a mere 2 to 3 per cent annual rate, the rest are forced into near, if not outright, deflation to restore their lost competitiveness. The consequences for domestic demand and debt sustainability were perfectly predictable.

The ECB was late to diagnose the issue and super-late to act. But the real issue is that neither its recent move nor any imagined future quantitative easing will do anything to reverse deflationary wage trends any time soon – trends established by deliberate policy.

Optimists point to the power of quantitative easing in weakening the euro. But higher import prices as such would only boost inflation temporarily. For a weaker euro to boost wage-price inflation lastingly, a very strong growth contribution from net exports would need to come forth. This in turn implies that the eurozone’s external imbalance, which is already headed for 3 per cent of gross domestic product, would need to grow a lot bigger. In short, the proposed solution is for the eurozone to build up a German-sized external surplus, currently running at some 7.5 per cent of GDP.

What went badly wrong for the eurozone internally, is supposed to be healed by repetition at the global level. Apart from any conflicting G20 commitments, these optimists have yet to provide us with their list of proposed deficit countries in the rest of the world.

The magician’s smokescreen has successfully diverted attention from the real issue.

Joerg Bibow, Professor of Economics, Skidmore College, Saratoga Springs, NY, US“