Daniel Gros writes:\u00a0 German Chancellor Angela Merkel acted in 2012 only when she could tell her domestic constituency that there was no alternative. But in the end, Merkel agreed to a permanent bailout fund for the eurozone. She also backed the formation of a banking union, which remains incomplete but still represents a key step toward a financial system supervised by the European Central Bank. Thanks to these measures, and ECB President Mario Draghi\u2019s vow, which Germany tacitly approved, to do \u201cwhatever it takes\u201d to save the euro, the financial storm abated.\u00a0 But now the eurozone seems incapable of escaping near-deflation, with little economic growth and prices barely moving upwards.<\/p>\n
When the crisis struck, the economies of the eurozone periphery were buffeted by the twin shocks of spiking risk premiums and a collapsing housing market. At the same time, the German economy benefited from the return of capital fleeing the periphery. Real (inflation-adjusted) interest rates in Germany became substantially negative, triggering a housing boom. It was assumed that this would generate strong domestic demand in Germany, helping the periphery to export more.<\/p>\n
Instead, the German economy has barely grown; indeed, weaker world trade threatens to put it in recession. The current-account surplus, which was supposed to decline sharply, has actually increased, as savings have remained higher \u2013 and investment lower \u2013 than expected.<\/p>\n
Inflation in Germany remains too low. With German prices rising at less than 1% annually, the eurozone periphery needs falling prices in order to regain the competitiveness lost during the pre-2008 boom years.\u00a0 This lack of dynamism at the core of the eurozone has now become its key problem. With no growth in Germany, the rest of the eurozone might not be able to reduce debt via external surpluses. And there might be no solution short of a magic button to increase German domestic demand.<\/p>\n
Obviously, the German government is in charge of the country\u2019s public finances. But fiscal policy has been roughly neutral in recent years, and thus cannot be blamed for the German economy\u2019s lack of dynamism. This year, the public-sector budget might move from a small deficit to what German officials call a \u201cblack zero\u201d \u2013 a very small surplus. But this tightening by a fraction of a percentage point of GDP implies no adverse effect on growth.<\/p>\n
The root cause of Germany\u2019s sluggish economic performance in recent years is the continuing unwillingness of its households and enterprises to consume and invest. And it is difficult to see what the government can do about thiis.\u00a0 Iinvestment has fallen despite financing conditions for enterprises that have never been easier, both in terms of ultra-low interest rates and banks\u2019 willingness to lend. Yet Germany\u2019s corporate sector remains reluctant to borrow and invest in the country, because it sees little reason to expect long-term economic growth, given that the population is set to decline and productivity gains remain anemic.<\/p>\n
So what more could the German government do to wean the Germans off their abstemious habits?\u00a0 Public investment is the one area where the government could act. But the growth fillip from public-sector infrastructure spending can only be modest. Increasing infrastructure spending by a quarter, which would represent a huge administrative effort, would lift GDP growth by just 0.4 percentage points.
\nThe main danger now is political. A weak German economy makes the necessary structural adjustments in the eurozone periphery much more difficult. That, in turn, fuels the perception that responsibility lies with the German government, which is seen as unwilling to take the steps needed to strengthen domestic demand.<\/p>\n
The German government does not even acknowledge that there is a problem. With unemployment remaining near record lows, the lack of demand growth is simply dismissed, and the absence of inflation is taken as a sign of success.\u00a0 Europe\u2019s German anchor has become stuck, and the rising tide of anxiety among Germany\u2019s partners should not leave its government indifferent.<\/p>\n
W-T-W.org women and finance raises a fundamental question:\u00a0 Should economists begin to formulate theories that do not make ‘consumption’ central.\u00a0 German and Japanese citizens refuse to be nudged. Are they wrong?<\/p>\n
Daniel Gros writes:\u00a0 German Chancellor Angela Merkel acted in 2012 only when she could tell her domestic constituency that there was no alternative. But in the end, Merkel agreed to a permanent bailout fund for the eurozone. She also backed … Continue reading ![\"Angela](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/11\/Angela-Merkel-300x300.jpg\")
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