Saturday 14 July 2012

When shoddy research is supposed to justify policy

There has been plenty of debate about why Germans are presumably unwilling to bail out other European countries in the Eurozone. And the German government has found itself increasingly under pressure to grant so-called Eurobonds, a financial instrument issued by the European Central Bank which in effect spreads responsibility for public debt in one country amongst all other countries in the Eurozone. Since many countries have amassed enormous public debt that they simply cannot service at this time, underwriting their national debts means nothing less than asking the German taxpayer to pay for the profligacy of other European nations. 
Now observers often note that Germans reject Eurobonds because they are afraid of inflation, a sentiment that is rooted in the painful experience of hyperinflation between 1920-23 in Weimar Germany. The Pew Center has now published some polling data that appear to show that Germans are willing to strike a more balanced approach, allowing some inflation in return for growth in the European economy. However, once you drill down into the results, the findings are not as robust as they may think. Here is what the Pew Center asked Germans in the polling what they are most concerned about (rank in order), offering respondents various options. The researchers from Pew found that ‘Germans are more concerned about unemployment (70% say it is a major threat) than they are about inflation (56%). Among the European nations ..., the Germans are the least fearful of rising prices’
They conclude that this may give Angela Merkel some room for manoeuvre and possibly support Eurobonds. But not so fast! Looking at the polling again, it seems that the researchers from Pew confuse a snapshot of German attitudes with their attitudes under conditions of future change. 
In other words, Germans may currently not be concerned about inflation exactly because they know that Angela Merkel stands fast and would not allow the European Central Bank to issue Eurobonds. If you wanted to know what Germans think about the danger of inflation once Eurobonds have been introduced, you would have to ask exactly that. So, it seems that it is the certainty with which the German government has conducted itself in the face of pressure that allows Germans to fear inflation less than unemployment. 

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