[...]Germany’s Incredible Shrinking Economy | afoe | A Fistful of Euros | European Opinion[...]…

As long as a government has command of its currency, can’t it make saving extremely unattractive?

“So since Germany can react to a decline in population and Japan won’t how can either country create enough internal demand to weather the current downturn?”

The simple answer is they can’t, since the high levels of elderly dependency which are about to arrive, and (in the case of Japan) the already high state indebtedness exclude the kind of “heavy duty” stimulus package that Obama is introducing in the US. Apart from France and the UK most EU countries will struggle with this order of spending, and we haven’t got to the second round in the bank bailout yet.

So all they can do is grin and bear it, and wait for the global economy to pick up again. And when this is all over, my guess is that a big part of Eastern Europe will have joined then in the same predicament. That is, next time round expect the “global imbalances” to get even bigger.

Solutions? I have no solutions. At the present time I am simply trying to document things as they happen.

While I agree that Germany has a much more daunting problem in its low birth rate, miserable return on personal savings and the continued structural bias towards exports but the one thing Germany can do that Japan probably won’t is to allow more immigration and loosen the current laws concerning naturalization. It would be exciting as heck for maybe one generation but all one can do is look to the Old Southwest and California to see that, aside from nativists and those that have trouble ordering tacos, the influx has been successful. Though the economy here is a shambles it should be obvious that it is not the fault of the immigrant in an entry level job.

So since Germany can react to a decline in population and Japan won’t how can either country create enough internal demand to weather the current downturn? Also do you think that the Porsche and Piech families are praying by some miracle that they can figure out a way to get rid of Volkswagen and wishing that they are not introducing the new sedan, the Panamera, at a time when sales are off some 22% in the US?

Basically they reveal themselves in very weak domestic consumption growth, which means that economic growth (which is needed to pay all those pensions and health care costs) is totally dependent on exports, and hence the economic well-being of others.

Thus, while both Germany and Japan had no housing bubble, or excessive consumer borrowing (in fact they were huge net savers, running large current account surpluses) their economies have folded much more quickly and much more dramatically than the rest. In addition their banks (and in particularly Germany’s) have lost large chunks of those savings financing others housing booms (the US, Spain, Ireland, Eastern Europe etc).

This is now the second time this has happened, since we saw a much weaker version of the same phenomenon after the internet bust in 2001. But each cycle this gets worse as the median age steadily rises, and I can’t imagine it is exactly pleasant for the Germans and the Japanese who haver to live through it.

So before these tow countries finally fall off there perches altogether I suggest it is time to do something, in the short term via encouraging immigration, and in the longer term by fomenting much more child friendly policies, making it much more attractive for those women who want to do so to have children, even if this comes at the cost of the welfare and pensions funding of the elderly. At this stage in the game their societies have precious little choice, and if they do nothing the long term future of these societies is obviously in jeopardy.

My view is “its the demography silly”, but then we can’t go back 30 years and change all that with the wave of a wand

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But you don’t explain anything about ‘demography’. I have no idea what the hell you’re talking about. Could you explain a bit?

“Regarding deflationary tendencies, what’s your opinion on incentives like Germany’s car scrapping subsidy? Should perhaps sales taxes be lowered for a short, predetermined period of time?”

Deflation is coming in Germany, and this is going to be a big headache for everyone. As for the car subsidy, I simply quote one of my Czech readers:

“Well, since Angela Merkel announced that EUR 3000 per car will be paid to those who exchange their old cars for new ones, and since the koruna went down to CZK 28 per euro, our export dependence on Germany looks much better. In fact, the German poor go for the euro handout in vast multitudes, but then they buy cheaper Skodas or Czech made Peugeots (Skoda actually cancelled most production cuts and is running at a fine tempo again, while the Toyota/PSA joint plant near Prague apparently did not have to make any production cuts at all). Such may be the effects of well meant state interventions into the economy – you spent the cash, but somebody else (eg Toyota, the Czech taxman, and the Polish workers in the Kolin plant) pocketed it. A real nice try, Frau Merkel, please do try again…”

I quote this not to advocate protectionism, but to argue that we are all in a really complex situation (see my posting of Claus Vistesen’s piece).

Incidentally, Michael Glos’s resignation. Could this be to do with the coming EU bank bailout? Do you have an opinion on this?