HYPERINFLATION IN THE EURO AREA?

Abstract

In the non-academic sector in Germany, it is often advocated that the expansion of the ECB’s money supply would inevitably lead to high inflation or even hyperinflation. This paper explores the question of whether inflation could arise in the euro zone, if so how high it would be and whether it would be hyperinflation. The work is based on theoretical considerations on the subject of hyperinflation and inflation and outlines a possible scenario in which the latter could actually become a reality. The thesis is that the greatest danger to the euro zone would come if Italy and / or Spain chose to leave the Union. Covid-19 has increased the risk of divergent economic developments in different countries in the euro zone. Italy and Spain have to reckon with a dramatic increase in public debt, weak growth and deteriorating conditions on the labour market. The main risk is unlikely to be that the euro zone will not help Italy or Spain, but the people in these countries may feel that aid is not enough, thus making an exit a serious option. If these countries left the Eurozone, then they would likely opt for an orderly exit. That means Italy would join EMS II after a one-time devaluation and not leave the EU. If the exit was not negotiated, then a disorderly parting would commence, which is the scenario with a high risk of hyperinflation.