Arnold Kling  

Germany

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The German economy is in bad shape. Brad DeLong points to a paper by Adam S. Posen that assesses Germany's potential to go into a long slump like Japan.


For an advanced economy to perpetually stagnate, its political economy must have the four elements of Japan’s negative economic syndrome:
· incomplete financial liberalization;
· macroeconomic policy division and deflationary bias;
· financially and politically passive households; and
· a lack of openness to trade or capital flows or foreign ideas.
Of all the OECD countries, only Germany has increasingly begun to share Japan’s political-economic profile.

Stephen Kirchner points to an interview with former Bundesbank director William Nolling.

"The truth is that the ECB is trying to carry out an impossible task," says Nolling. "You cannot set one interest rate for 12 very different nations - that's a problem which won't go away".

..."The point is that it is simply not in Germany's economic interest to allow major parts of our policy to be implemented by bodies which are not responsible for Germany."


Posen's argument, the logic of which escapes me, is that Germany would be better off ceding more of its policy prerogatives to Brussels. Nolling, obviously, is suggesting the opposite.

I believe that the promise of the European Monetary Union was supposed to be that it would lead to dramatic gains in economic liberalization with relatively little cost due to the constraints that monetary union places on national macroeconomic policies. However, it seems to me that in practice the liberalization has been slow and the macroeconomic costs have been high.

For Discussion. Is the European Monetary Union turning out to be a mistake?



COMMENTS (3 to date)
David Thomson writes:

The European Monetary Union is doomed by the harsh fact that many of its members are committed to Socialism. Thus, those nations desiring to embrace more sensible economic policies are prevented from doing so.

Some naive folks compare the European efforts to that of the fifty states comprising America. This absurdly ignores the fact that the government of the United States is about 127 years old! We have had a long time to get our act together. Many European countries are mere babies next to us. We had a chance to naturally evolve our monetary policies. The Europeans are trying to do everything virtually overnight.

dsquared writes:

Ask Spain and Ireland ....

Eric Krieg writes:

The EU is the best thing that could have happened to the Germans. The EU has put the Germans in a monetary and fiscal straightjacket. They have no control over interest rates, and they can't deficit spend their way out of recession.

This will either cause stagnation, or more than likely, be the basis for Reganite reform (i.e. DEREGULATION).

The biggest force holding back the German economy, besides high European taxation, is an overly regulated economy. Deregulation is the answer to their problems.

Now, maybe it will take some time for economic stagnation to sink in and change the German socialistic mindset. But it will happen, make no mistake.

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