Germany’s anti-Keynesianism has brought Europe to its knees

eurozoneThis 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. Continue reading

Germany’s budget surplus: how do they do it?


The German Bundestag. Change is needed on all sides involved in the current crisis, not least in Germany.

The German government’s ‘record’ post-unification budget surplus of nearly 24bn euros was in the news this week. As a percentage of GDP it is a mere 0.8%, but compared to the UK’s deficit of just under 4%, they seem to be doing relatively well, at least in terms of the desire expressed by many politicians for governments to ‘live within their means’. And this surplus does not seem to have come at the expense of economic growth. The German economy grew by 1.9% in 2016, the fastest in the G7 group of the largest economies in the world.

So how is this possible? Quite simply, it is down to the competitiveness of German exporters, achieved at the expense of ordinary German workers over the last decade or so.

Firstly, the deregulation of the labour market put downward pressure on wages at the bottom of the scale, so that Germany now has record numbers of low-wage, insecure jobs. Continue reading

Good for Germany, good for Europe

Coat_of_arms_of_Germany.svgAfter years of frugality, German consumers are finally spending again, at a rate not seen since the dotcom boom of the 1990s. According to the FT, private consumption is growing at about 2% per annum, driven by high levels of employment, rising wages, and low inflation and interest rates. This is welcome, and not only for German growth. If sustained, it could help rebalance the economies of both Germany and Europe.

Germany is the largest economy in Europe, and a number of economists have argued that its large current account surplus, far from being a virtue reflecting a culturally frugal population, is the flip side of the large current account deficits in the Eurozone periphery which led to the crisis in 2010. In short, in order for countries in the periphery like Spain to recover and rebalance while sustaining growth and reducing unemployment, Germany’s economy also needs to rebalance. The latter should involve higher wages, consumption and investment and lower net exports driven by higher imports.

The sum of all the current account surpluses and deficits in the global economy must by definition sum to zero, even if in practice measurement errors mean that they don’t quite. Given this fact, it is no good preaching to Spain to reduce its current account deficit in the absence of its trading partners reducing their surpluses. Continue reading