Wren-Lewis, S. (2014) “Getting The Germany Argument Right“, Social Europe Journal, 11 Νοεμβρίου.
As the Eurozone experiences a prolonged demand-deficient recession, and given Germany’s pivotal role in making that happen, it is important to get the argument against current German policy right. It seems to me there are two wrong directions to take here. The first is to argue that Germany needs to undertake fiscal expansion because it has more ‘fiscal space’, to use a phrase the IMF use a lot which I dislike. The second is to argue that Germany needs to expand to help its Eurozone neighbours.
The problem with the first argument is that it legitimises the fiscal rules which are ultimately the source of the Eurozone’s current difficulties. If we look at the Eurozone as a whole, its fiscal policy is tighter than in the UK and US. As Fraser Nelson notes, the UK has a larger structural deficit than any other EU country. With interest rates at their zero lower bound, this shows that UK policy – while far from appropriate – is not quite as inappropriate as in the rest of the EU. The right policy when you are in a liquidity trap is to have a fiscal stimulus large enough to get you out of that trap. Within the Eurozone, the only countries that might be exempted from this fiscal expansion are those on the periphery. Otherwise we need a fiscal expansion in France, Italy, Spain, the Netherlands etc, as well as Germany.
The problem with the second argument is twofold. First, it tunes in with the popular sentiment in Germany that the country is yet again being asked to ‘bail out’ its Eurozone neighbours. Second, it implicitly suggests that the current German macroeconomic position is appropriate, but that Germany must move away from this position for the sake of the Eurozone as a whole. The obvious German response is to list all the reasons why their economy is currently on track (see, for example, Otmar Issing in the FT recently), and suggest therefore that other countries should look at their own policies for salvation. This is how we end up needlessly discussing structural reforms in France, Italy and so on.
- The Editors (2014) “What’s Bad for Germany Could Be Good for Europe“, Bloomberg View, 04 Noεμβρίου.
- Wren-Lewis, S. (2014) “Why the Eurozone suffers from a Germany problem“, Mainly Macro Blog, 26 Οκτωβρίου.
- Mitchell, B. (2014) “Eurozone battle lines being drawn again with Germany on the other side“, Bill Mitchell Blog: Modern Monetary Theory – Macroeconomic Reality, 27 Οκτωβρίου.