There was one post yesterday, “Germany’s Drag:”
I want to follow up a bit on Brad Setser’s post about the German fiscal surplus.
Here’s my point: at the moment, what we’re seeing in elite circles is a very belated but still welcome realization that monetary policy badly needs an assist from fiscal expansion. If structuring this one-two as helicopter money makes people feel better, fine; but the combined fiscal-monetary push is what matters.
But there are a couple of huge obstacles to carrying this project out. One is the US Republican Party, which is already getting ready to pursue scorched-earth obstruction to a Clinton presidency. But the other is the German problem: Germany’s obsession with fiscal probity, grounded in the fact that when it comes to macroeconomics Germany lives in a different intellectual universe from anyone else. And circumstances have given that German obsession much greater impact than bad ideas usually have.
Think about the nature of Europe’s problem. It’s actually twofold, or maybe two-and-a-half fold.
First, the euro area in aggregate suffers from at least the early stages of secular stagnation, which it’s entering with an inflation rate that is half the ECB target and even further below where the target should be. Breaking out of this lowflation problem really needs a fiscal boost.
Second, relative prices and labor costs are still misaligned within Europe, with southern Europe still needing internal devaluation that would be much easier if Germany were booming and experiencing higher inflation.
Second and a half, still a banking problem that surely requires further injections of public funds.
But Germany wants to run surpluses and wants everyone else to run surpluses. Germany’s tight fiscal policy directly contributes to weakness of overall European demand, and its deficit hawkery is an important reason why other European countries that have low borrowing costs are still pursuing austerity.
On top of that, German fiscal tightness means that the boom-and-inflation that should be helping internal devaluation in the south — which would, by the way, be the counterpart of the boom-and-inflation in the south from 2000 to 2007, which brought Germany out of its late-90s doldrums — isn’t happening. And this forces continued austerity in southern Europe.
Finally, as I understand it, it’s basically Germany demanding bail-in of private creditors on bank rescues, largely to block further government borrowing, which is sometimes a good idea but right now is perpetuating the simmering banking crisis.
So Germany’s fiscal obsession has a sort of multiplier effect on Europe, and indirectly on the world, that is disproportionate even to Germany’s economic size. And this makes me wonder whether all the sea-change in elite opinion that we’ve seen will do much good, since the government that most needs to change its policies isn’t listening.