The European Central Bank’s rate cut has led to huge tensions, with the executive board split and many German economists protesting. As usual, a lot of the argument is about the perception that those lazy Southern Europeans are getting a free ride.

According to an article published recently in the Financial Times: ‘A commentary by the chief economist of the financial weekly WirtschaftsWoche called the decision a ‘diktat from a new Banca d’Italia, based in Frankfurt.” Why can’t those Italians, etc., pull up their socks the way the Germans did?

What Germans – economists as well as the general public – still don’t seem to get is how much Germany’s success at emerging from its late-1990s doldrums depended on a somewhat inflationary boom in southern Europe. And they therefore also don’t realize how much damage Germany is causing by refusing to allow higher inflation in the euro zone.

After the euro’s creation, Germany was able to achieve large gains in competitiveness without deflation because Spain and others were willing to accept inflation that was well above 2 percent. But now the euro zone has an overall core inflation rate below 1 percent, which means that Spain can only achieve internal devaluation through crippling […]