Keeping inflation down in a Currency Union: A Policy for Germany but not for many more...

In this post I describe how monetary union without fiscal union creates a fertile ground for permanent exposure to the damage of asymmetric shocks. One side of this equation is that the economy not affected by the negative shock still benefits from the low interest. This in turn leads to high rates of inflation. This should be a concern for any country, as the cheap credit may stimulate a bubble. For a country like Germany, there's the added cost of loss of competitiveness. It hit me a while ago that there's a simple solution to this problem: Germany can unilaterally tax loans. By doing this it should increase the cost of borrowing back up, and it shouldn't be particularly hard to figure out what the tax rate would have to be, given the decrease in the interest rate, to leave the after tax interest rate of Germany untouched, in order to abort the bubble before it grew.