Knowing and Making

Rising German bond yields over the week since the Irish bailout have been interpreted ( here  and here ) as an increase in default risk to the German government. But surely there is another "risk" much more likely to explain this increase. And that is the simple risk of inflation. The Irish bailout must make inflation more likely - through one of two routes. One : ECB liquidity support, i.e. lending to Irish and other banks, might not be repaid - which will result in an effective increase in money supply unless the ECB then tightens monetary policy to reduce it, which would be politically quite difficult. The ECB lending is secured on bank assets, but we know that those assets might not be worth 100% of their nominal value. So in the case of a bank default, the ECB has printed a billion euros to buy an asset which repays less than a billion euros of principal. Two : monetary policy may be deliberately loosened, either to help reduce the pressure on sovereign borrower...

I don't have time to write a detailed post today so let me do something slightly unfair by picking holes in somebody else's. Stephanie Flanders writes about (among other things) the risk to UK exports posed by the slowing eurozone economy. Germany seems to have had no growth at all, the Italian economy shrank by another 0.2%, and Spain by 0.1%. Between them, those three countries accounted for 15% of UK exports in 2008. Sounds terrible. But wait, there is a little bit of good news to partly make up for it: British exports to China were 53% higher last month than in January 2009. But they start from a very, very low base: just 2% of our exports went to China in 2008. In total, about 12% went to the Brics - with about 75% going to advanced economies, primarily the the US and the EU. Solid growth in Europe is a necessary condition for a healthy recovery in the UK. So the latest weak numbers from across the channel have given the MPC one more reason to keep the door to further...