This report from Reuters reveals the thinking of some German lawmakers.
Category: EMU
Kevin has raised the issue of differing attitudes in Europe and the US about the need for expansionary fiscal policy, with the Germans being particularly reluctant to adopt expansionary policies. This piece in today’s FT shows that some of the difference in attitudes reflects German concerns about US monetary policy.
The piece cites Christoph Schmidt, an adviser to Angela Merkel, as saying:
I see an inflationary risk in the US in the medium term because of the development of money supply there.
It also cites Klaus Zimmermann, president of DIW:
The central banks in the US and the UK are now literally printing money. This creates an inflationary potential that is difficult to stop.
In other words, rather than recommending that Europe follow the US in providing more fiscal stimulus, these influential German economists prefer to argue that US policy has already become dangerously expansionary and provides a bad example.
In my opinion, these statements illustrate three popular misconceptions.
Axel Weber made an interesting speech last night. He recognises that European fiscal assistance to a member state may be possible, but only under extreme conditions. Moreover, in order to comply with the ‘no bailout’ clause, any loan would have to be conditional (he does not specify the list of conditions).
Key part of the speech:
“It should be emphasised that the “no-bail-out” rule, as stipulated in the EC Treaty, is an indispensable instrument for preventing moral hazard behaviour by the member states. With that in mind, issuing blank cheques would definitely be the wrong course of action.
Yet, EMU is our common destiny. If any kind of help for a member state were necessary in the improbable case of an extreme emergency, the clear conditionality of such support would be essential in order to comply with the Treaty.”
Paul Krugman’s article in today’s NYT describes his perspective on the European situation. His main focus is on thedifficulty in European-level policy coordination, in view of the current institutional configuration. However, he also flags the adjustment difficulties facing Spain (largely similar to those facing Ireland):
“In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.”
It is interesting to note that Krugman accepts the thesis that wage cuts are required as part of regional adjustment within the euro area (indeed, he has signalled this on his blog in the past). For Ireland, the level of pain may be lower than in Spain, in view of the relative flexibility in the labour market and the potential for the social partners to contribute a pain-reducing level of coordination to the wage adjustment process as part of an overall reform package. However, a slow rate of adjustment will lead to a prolonged period of high unemployment. In addition, the slower the rate of economic recovery, the worse will be the fiscal situation.
Deutsche Bank have an online summary analysis of the problems facing the Irish economy (hat tip Turbulence Ahead). Overall, it provides a reasonable account of the current situation. However, it does perpetuate the misleading impression that the the scale of the Irish banking system is extraordinarily large relative to its GDP. As has been noted repeatedly on this blog and elsewhere in the domestic media, the aggregate statistics are dominated by the ‘pure offshore’ activities of international banks at the IFSC, with the ‘domestic’ component of the banking system large but not to this ‘off the charts’ extent.