In previous posts I have focused on the problems of Eurozone current account imbalances and misalignments (differences in competitiveness). In theory this problem need not lead to overall recession in the Euro area, if growth and inflation rose significantly in Germany. They will not, as I point out here, in part because of the impact of the familiar zero lower bound constraint on the ability of the ECB to stimulate growth in the Eurozone as a whole. (Although unfortunately we cannot be sure what the ECB would do in the absence of this constraint.). However another factor is attitudes in Germany, which is what this post is about.
Some of this just reflects national interest in the context of a relatively healthy macroeconomic position. In particular, unemployment is remarkably low. The chart below compares Germany to the OECD as a whole.
 |
| Unemployment in Germany and the OECD (%, Source OECD Economic Outlook) |
The OECD story is all about the 2008/9 recession, of course. In the case of Germany you would be forgiven for asking – what recession? The reasons for this remarkable performance are not fully understood (see here for example – GDP fell by 2.6 5.1% in 2009), but the upshot is that the pressure from high unemployment felt in other countries is absent in Germany.
GDP growth was slightly negative in the final quarter of last year, and it looks weak this year (OECD forecast 0.6%), and still not great in 2013 (OECD forecast 1.9%). So from one point of view we might think there is scope for some (quick) stimulus? But inflation is projected to be only a little below 2%. The OECD think the output gap was negative but slightly less than 1% in 2011, while the German Council of Economic Experts estimate output is more than 1% above potential. In these circumstances the case for stimulus does not look strong.
This is not the full story. The striking thing about Germany is that there appears to be no discussion of possible stimulus. In other countries the fourth quarter data, the prospects this year, plus uncertainties about growth in the rest of the Eurozone, might be expected to lead to some discussion of the need for some precautionary stimulus. Yet this seems almost completely absent in Germany. Arguably there is more discussion outside Germany than within (see Tyler Cowen vs Paul Krugman here for example).
As long as I can remember, there has been an aversion to countercyclical fiscal policy within the German economic policy establishment. (Those already irritated by my personal anecdotes can skip the rest of this paragraph.) My first job when I worked in the UK Treasury was forecasting the European economies. It was just after the first oil price shock, and the UK and world were in recession. The Chancellor Dennis Healey wanted to use fiscal policy to stimulate the economy. The Treasury’s Chief Economic Advisor was invited to meet his counterparts in a short trip to Germany, and I was selected as a note taker. I remember this occasion not so much for the hospitality (which was excellent), but because I cut my long hair just before the trip, and therefore stopped looking like (acting like?) a hippy. I think I thought German officialdom might be slightly shocked if I did not. Anyway, I also remember that my senior colleague’s attempts to sell the UK view on fiscal stimulus – both in that context and as a general concept – met with a pretty unfavourable response.
All this is part of ‘Ordoliberalism’: see this excellent post by Henry Farrell, or this from Dullien and Guérot at the European Council on Foreign Relations (HT Phillip Lane). It is not some simple hangover from the inflation of the Weimar Republic, or the Depression that followed. Christopher Allen suggests that Ordoliberalism was in part a reaction to the abuses of state power by the Nazis. Recall also that while money supply targeting was only fleetingly tried in the UK and US, it was the official policy of the Bundesbank from 1975 until the formation of the Eurozone. (Some argue its actual policy could be better described as ‘flexible monetarism’ and was not that different from inflation targeting).
The chances of Germany assisting adjustment in the Eurozone by enacting a fiscal stimulus programme are therefore very slim indeed. Equally unfortunate may be the influence this anti-Keynesian view has on policy in the Euro area more generally. However, in the longer term I wonder if Ordoliberalism and Keynesian ideas are really that incompatible. Dullien and Guerot define the central tenet of Ordoliberalism as “governments should regulate markets in such a way that market outcome approximates the theoretical outcome in a perfectly competitive market”. The New Keynesian view of stabilisation policy is to bring the economy as close as possible to the market equilibrium that would prevail if prices were flexible. That does not sound so different.
With flexible exchange rates stabilisation would normally be done by monetary policy (to get to the natural real interest rate), but in a monetary union it has to be done using fiscal policy. I have argued that the antagonism to Keynesian policy in sections of US academia may in part reflect an outdated reaction to old fashioned Keynesian ideas and the ideology that was perceived to go with it. Perhaps the same may be true in Germany. As Henry Farrell notes, after the current recession the German government was eventually persuaded to enact a fiscal stimulus package. [For much more detail on this episode, see the new paper by Farrell and Quiggin available from Crooked Timber.] Although moderate by UK or US standards, it suggests the ideology is not immutable. For the moment, unfortunately, the ideology in its present form continues to do the Eurozone serious damage.
0 Comments