There are signs of optimism around. Cautiously, policy makers and commentators start discussing the shape (and the fragility) of the future recovery. Martin Wolf on the Financial Times already speculates on the timing of reversal to a normal state of affairs. Wolf is rightly worried by the temptation to reverse policies too fast, a mistake we made already at the end of 2009, when stimulus plans were reversed into consolidation far too soon.
As a rule of thumb, I’d argue that exceptional involvement of governments in the economy should stop when the private sector is ready to take the witness. Stimulus plans and monetary easing should be rolled back once private spending resumes (or is ready to resume), and when the credit market is sufficiently loose. So the question is, how does private sector behaviour fit, within this moderate optimistic mood? Not too well I am afraid… Read More
An excellent post by Paul Krugman on Germany’s flawed view of the Eurozone. He points to the obvious: unless we trade with Mars, it is plain impossible that all countries base their growth on exports. If the Germans want to sell their Mercedes to Italians, they need to be willing to buy our pasta (I feel so original…).
Germany’s success rests on other countries’ excess consumption, and on converging interest rates, that for a decade led to capital flows into the EMU periphery to finance consumption of German goods. In a sentence, and simplifying: without Greece, Germany would not be in place to lecture other countries today.
The least Germany could do is to give back something through an expansion of domestic demand that could make the adjustment in the periphery less painful. I had myself made this point a while ago. I also remember an old editorial by Martin Wolf that ended saying something like “If Germany wants the rest of Europe to be more German, it needs to be less German itself”. I Could not agree more…
Instead, German leaders and economists spend their time perpetuating the false narrative of expansionary fiscal contractions, so well debunked by Krugman and De Long among others. The obvious does not seem so obvious to them…
I come back to my first post. Solidarity and symmetry seem bad words in today’s Europe, but to me are the keys to the exit from the EMU crisis (and if you read Jean Monnet, the founding fathers had the same ideas…)