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The real problem with German macroeconomic policy

Wren-Lewis, S., (2013), “The real problem with German macroeconomic policy”, Mainly Macro Blog, 03 Νοεμβρίου.

Paul Krugman has been laying into Germany in the past few days . I think it might be interesting to look at two possible defences for the German position. The first is that they are doing what any government would do, which is act in their national interest. The second is that, for from being at the centre of the Eurozone’s (EZ) problems, they have been holding it together.

Take the national interest argument first. If the EZ really had an EZ government that took decisions in the overall EZ interest, then given the problems with ECB monetary policy (whether self-inflicted or otherwise), EZ fiscal policy should be expansionary – or at least not contractionary. Given the needs of periphery countries, this implies fiscal expansion in Germany. The problem is that this appears not to be in the German national interest, because growth has been relatively healthy in German, unemployment is low and inflation not that low.

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