An explosive mix for the euro zone in 2021: Inflation and Germany’s Federal Constitutional Court

Fiscal deficits will remain very high in 2021 in the euro zone, as the degree of underemployment will remain massive and new public spending needs will arise. To make these fiscal deficits possible, the ECB must therefore be able to fully monetise them. But one major problem could lead to another public debt crisis in the euro zone, in the form of the simultaneous combination of: Relatively high inflation, due to the fall in productivity among companies under the effect of the new health rules, driving up unit production costs; A tighter constraint on the ECB resulting from the ruling of Germany’s Federal Constitution Court in May 2020, which may prevent the ECB from buying government bonds if it cannot say that it is doing so to get inflation back up towards 2%. It would no longer have this excuse if inflation did rise above 2% in 2021. The ECB must therefore find arguments for it to keep large-scale quantitative easing in place despite higher inflation.