For the world to pull out of its present economic crisis, all four of the big economic actors — the USA, the European Union, China, and Japan — are going to need to do some heavy lifting. And of the four, the EU is the biggest. And of the EU’s member states, the biggest is Germany. And German Finance Minister Peer Steinbrück — an erstwhile social democrat, no less — is lambasting the “vulgar Keynesianism” of Gordon Brown and other stimulus advocates and thereby doing a considerable amount to block stimulus all across the EU. As Paul Krugman explains it’ll be very difficult for the Finlands and Denmarks and Portugals of the world to take decisive action without Germany cooperation:
The reason is that the European economy is so integrated: European countries on average spend around a quarter of their GDP on imports from each other. Since imports tend to rise or fall faster than GDP during a business cycle, this probably means that something like 40 percent of any change in final demand “leaks” across borders within Europe. As a result, the multiplier on fiscal policy within any given European country is much less than the multiplier on a coordinated fiscal expansion. And that in turn means that the tradeoff between deficits and supporting the economy in a time of trouble is much less favorable for any one European country than for Europe as a whole.
It is, in short, a classic example of the kind of situation in which policy coordination is essential — but you won’t get coordination if policymakers in the biggest European economy refuse to go along.
Germany is, of course, a pretty big economy on its own terms. And while none of the small European countries is a very big economic player (that’s why I call them small) they collectively represent a fair share of world output. So Germany’s actions are going to be very bad for the entire world and especially bad for Germany’s neighbors in Europe.