This paper by Jorg Bibow has a useful take on how an ideology of anti-Keynesianism among German policymakers and its economic outcomes as a popular mythology result from a misreading of economic history. This faulty economic analysis has arguably played a major role in the eurozone crisis, and recent improvements in the eurozone economy are at the expense of the rest of the world. This is a form of ‘beggar-thy-neighbour’ policy, as a weak euro is stimulating demand for eurozone exports from its external trading partners, while domestic demand in the region remains weak. The eurozone economy is therefore improving by making the zone as a whole more like Germany in recent history, which has ‘succeeded’ via a dependence on export-led growth.
Figures 1-3 on pp. 29, 32 and 33 of the paper illustrate the imbalances among eurozone countries since the late 1990s.
These extracts from the paper give some idea of its conclusions:
“The eurozone’s domestic demand has yet to regain its precrisis level. Meanwhile, Germany’s current account surplus has reached 9 percent of GDP – the biggest in the world. Internally, sectoral financial balances show persistent surpluses for both the household and corporate sectors. Reflecting the protracted weakness of corporate investment despite lavish corporate profits, the corporate sector’s surplus has grown even bigger since the crisis. Following five years of “excessive deficits”, the general government budget was balanced by 2007-08, and though briefly interrupted from 2009-11, has been balanced again since 2012. Germany’s soaring external surplus makes this possible: the German model balances Germany’s government budget as other countries load up on external debt corresponding to their external deficits.
Today, the external counterpart to Germany’s exorbitant current account surpluses may no longer be primarily in the eurozone, as they used to be prior to the outbreak of the euro crisis, since imports of Germany’s euro partners have shrunk in line with their compressed incomes and remain depressed, just as unemployment levels remain elevated. Instead, the eurozone’s overall current account surplus has now reached 4 percent of GDP and the constellation of sectoral financial balances has come to resemble Germany’s. In effect, having brought Europe to its knees, Germany is now also holding the world community hostage, asking them to tolerate perpetual eurozone freeloading on external demand, or else risk pulling the rug out from underneath the euro. (p.32-3)
…Europe’s tragedy is that under the thick fog of its monetary mythology, Germany failed to appreciate that the success of the German model critically depends on others behaving differently from itself. Exporting the German model to Europe was begging for trouble, and featured a fallacy of composition: Germany’s export engine would stall when everyone becomes just like Germany. (p.34)
…Asymmetric adjustment (of debtor countries only) and an inadequate macro policy stance continue to hold back recovery in the eurozone. (p.35)”
Policies which encourage a more rapid expansion in domestic demand relative to foreign demand in Germany would go a long way towards bringing the eurozone out of its serious economic problems in a more sustainable way than the current ‘muddling through’. A change of focus to a symmetric rather than asymmetric adjustment between countries is absolutely necessary to this end. Economic and political interests in Germany may be preventing such a shift, rationalised by the ideology and mythology described in the paper. A dramatic shift in policy may then require more than attempts to make sound arguments to those in authority, which seem to date to have been falling on deaf ears. But the problems remain.