This Time Is Different? Inflationary Pressures, Germany’s Eurozone Trilemma, and the Consequences for the Economic and Monetary Union

After two decades of low inflation in the eurozone, the Covid-19 crisis triggered inflation rates to rise well above the target of the European Central Bank (ECB). The inflationary pressures mark an important difference between the economic crisis related to Covid-19 and the eurozone crisis. In this article, we examine what the new inflationary pressures mean for the strategic environment of eurozone member states and their policy options in the Economic and Monetary Union (EMU). In particular, we ask how high inflationary pressures affect the policy options and EMU strategy of Germany as the eurozone’s most powerful surplus country. We argue that these developments put Germany in a trilemma between maintaining the status quo (austerity in ‘debtor states’), engaging in internal adjustment (revaluation at home), and committing to financing polices in the eurozone (redistribution from ‘creditor’ to ‘debtor states’). Each of the three policy options is associated with high political and economic costs for Germany. To understand how Germany can react to this trilemma, we analyze the extent to which German state elites have undergone a process of policy learning since the eurozone crisis, allowing for an incremental shift away from the status quo and towards internal adjustment and financing policies. In doing so, we design a fine-grained causal mechanism and test our expectations against evidence from original semi-structured interviews with German state elites and government representatives. As a result, we expect high inflationary pressures to cause a covert policy change towards internal adjustment and financing policies, e.g. in the form of an informal relaxation of the German debt brake, a consolidation of the Corona recovery fund, and a revision of the Stability and Growth Pact (SGP). Hence, by applying the concept of policy learning to current eurozone politics, the article offers new insights into EMU governance and the role of powerful states in the context of differentiated integration.