Comments on: Oooops It Isn’t Baaack….

By: c

Wed, 13 Jul 2005 23:54:55 +0000

Germany has put export before growth with its labour reforms and its increase in the work week. (less free time cost real money as you have less time to shop around or do yourself which really leads to a lowering of income)

By: Edward

Edward — Wed, 13 Jul 2005 14:47:09 +0000

Incidentally, for more on the state of German finances see the post on this topic I have just put up on A Few Euros More, and for more on how this could all at some stage turn critical this from Mathew Lynn (also on Afem):

“This isn’t the moment for small-minded technical arguments about how far exchange-rate changes boost or depress an economy. It is the moment for bold action. At some point, people will tire of permanently low growth. If the euro area can’t perform better in the next five years, there may not be a euro for the ECB to defend”.”

By: Edward

Edward — Wed, 13 Jul 2005 13:46:48 +0000

@ c

Unfortunately at the moment I don’t have the time or the energy to give this post the energy it deserves. I think the issues are important, and irrespective of whether or not there is an LT, the points made in the MS debate are valid in the sense that if sustained growth doesn’t begin to arrive in Germany and Italy (and this is mainly what this is about) in the autumn or early next year then the ECB is going to be faced with ‘life threatening’ problems.

Back to the VAT issue, the essential point is that simply moving costs from supply to demand may not have any noticeable effect. The German economy is caught in a kind of pincers trap. There are labour market supply side problems, but there are also demographically related demand side ones.

Really the whole burden has to be reduced, are there are no real alternatives to cuts, possibly quite big ones. So that means reducing non-wage costs, and *not* raising VAT to compensate, otherwise you just shift the problems around. Especially in terms of global imbalances, with Germany becoming yet another export and savings surplus economy.

By: c

Wed, 13 Jul 2005 10:05:20 +0000

Holland and Germany have had goverment police of deflation. Italy has had one out of reality. Surprisingly *cough* the rest of Euroland didn’t do badly.

By: Doug

Doug — Wed, 13 Jul 2005 03:12:19 +0000

Maybe other micro issues at work too. My sieve-like memory tells me I was reading recently that many Mittelstand companies got used to finding other sources of funding during the credit-tightening that was part of the run-up to Basel II and other features of corporate life since ca. 2000. Since the Mittelstand is still something like 2/3 of the German economy (says the sieve-like memory again), this would have a real macro effect on domestic demand.

On the other hand, maybe the eurozone interest rate really is too high for Germany. If the Bundesbank were still making European monetary policy, and not that other bank in Frankfurt, there might be less of a worry about flagging German demand. The down side would be more inflationary worries in Spain and possibly France. Italy would probably do well out of the situation, and Ireland would probably be more concerned about the Old Lady.

Interesting debate–liquidity trap of some sort vs a rate that’s still too high for Germany. Hmm, will have to go see what kind of monetary people Merkel is likely to bring along. Don’t think that financial markets have really been her thing…