Steven Pearlstein has an excellent column noting that though Greece is to blame for Greece’s structural fiscal and economic problems, the larger story of Club Med economic woes is substantially made in Germany as a result of unsustainable policy choices. A choice graf:
While European governments surely have long-term structural budget problems, the immediate fiscal challenge comes from the decline in tax revenues and the increase in transfer payments that result from slow growth and high unemployment. The right policy response to that — along with the very real threat of price deflation in Europe — isn’t to put the entire continent in a fiscal straitjacket that makes the recession even worse. The immediate need is for the European Central Bank to deliver additional monetary stimulus in the form of lower interest rates and direct purchases of government bonds. The reality is that the price of avoiding a dangerous deflationary spiral in Greece and Spain is allowing inflation in Germany to rise to 3 or 4 percent.
To critique the column slightly, however, Pearlstein writes that “Germans, by their nature, are eager to save and reluctant to spend their newfound wealth on imported goods and services” which I doubt is the whole story. As is typically the case, there’s also a lot of interest group politics at play. Manufacturers of tradable goods constitute a powerful lobby that both benefits from Germany’s export-oriented economy and also encourages the German population to think of export-orientation as an expression of admirable aspects of German character rather than deliberate policy choices.
Interestingly, in a recent FT interview Germany’s finance minister appeared to acknowledge all of this and called for much closer “political union” for the EU that “naturally means a bit of federalism in the German sense of federal.” I didn’t initially understand what the reference to a “German sense of federal” meant, I’m told this is probably a reference to Germany’s tradition of explicit transfers from richer to poorer states. And, indeed, this is what Wolfgang Schauble seems to be saying:
“Germany has a lot of experience with federalism, more than the UK or France. If you want to create a federal organisation, you must be ready to have a certain amount of redistribution within it. You can dismiss that by rudely calling it a ‘transfer union’. But strong and weaker states both have their responsibility. We are asking a lot of the weaker ones, but the strong also have their responsibility, and we must explain that as well.”
I think that’s correct, but German public opinion and the actual policies of the German government don’t appear to be trending in that direction.