The threat of hyperinflation in Europe

Hyperinflation rarely happens in ‘coherent and cohesive’ societies says GMO’s James Montier. Unfortunately, Europe is neither of those things.

I interviewed GMO's James Montier last week. Subscribers can read the full interview in the magazine on Friday, but there is one bit I couldn't quite fit in Montier's views on hyperinflation. He isn't much worried about it in most places (it rarely happens in "coherent and cohesive societies"), but the one place where he suggests there might be risk is in Europe.

Economists, he says, generally forget that "their subject is not economics, it is political economy". Look at Europe and you can see that under economic rules it should have split already, but the politics of the eurozone mean that "economics is a slow burn force" there. That suggests that it could "trundle along for another decade" in a miserable state of low growth. It might then accept the need for fiscal transfers that would help.

Quantitative easing (QE) wouldn't be a bad thing either it will at least stop bond yields in some countries crippling them. The problem is that while bond vigilantes are irrelevant in the UK, US and Japan (see the full interview for more on this) they are all too relevant in Europe, where there is still no real state-backed bond buyer of the last resort and there is therefore real credit risk.

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QE can change that and buy the Eurozone some time. What it can't do, however, is solve its problems.

In the end there will be a break up, and then there could easily be hyperinflation. Look, says Montier to all previous breakups of monetary unions: the Russian Federation, the Hapsburg Empire, etc. "One of the underestimated costs of eurozone disintegration is hyperinflation."

There's more on the history of this here.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.