A (positive) German shock?

Eurozone Watch has two articles about Germany and Italy that offer support for an optimistic view of the European economy. For a start, Sebastian Dullein argues that a comparison of Germany today and the US after the early 90s recession shows that Germany might be on the brink of a productivity surge. Dullein argues that labour productivity growth at the moment is being depressed by the re-absorption of the long-term unemployed, which also happened in the US in the early 90s. He quotes a figure of 7.6 per cent for productivity change (per employee, rather than per hour worked) in the metalworking industries (in Germany, a term that covers most of the industrial sector), which is positively stellar – after all, the US didn’t pass 2 per cent per-hour until 1998, well into the boom.

He also criticises Wolfgang Munchau for arguing (in essence) that there had been no structural reforms that accounted for productivity growth, and therefore that there was no growth. At this, I think I heard J.K. Galbraith’s ghost chuckle into his martini – it is indeed a fine example of all that is wrong with economics as a discipline that one can argue that we must all reform because there is a crisis, the evidence of that crisis being that one’s reforms have not been adopted.

An alternative argument would be that there was not all that much wrong with German firms in the first place. It is suggested that R&D spending is too low, but Dullein argues that it’s picking up. And anyway, their products can’t be that bad, as the rest of the world wants to buy German exports more than anything else. He also notes that there has been a wave of capital investment since 2002.

This possible German shock is already reverberating interestingly. Italy, for example, is experiencing better economic times, with growth picking up and strong industrial order books – especially on orders from France and Germany for capital goods. The growth is despite an increase in the tax take, with the result that the government is likely to have a chunk of change on hand. The OECD and the EU Commission would rather like to see that used to cut the monster public debt, still running at over 100 per cent of GDP. But the political situation might make that unlikely.

That might be the good news, though. When wasn’t the Italian government up to its eyes in debt? And it’s almost traditional that political turmoil in Italy is accompanied by good economic news. The difficult bit, though, is that Italian inflation is running somewhat slower than German – this implies, of course, an improvement in the terms-of-trade. Probably, Italy has done some internal disinflation, being unable to devalue – but this implies that wages have suffered relatively. The question is how to redistribute the benefit of the German shock without killing the golden goose.

Inverse Nixon Theory

It’s been said in the past – indeed, it used to be conventional wisdom – that unlikely right-wing governments were more likely to make peace, because they enjoyed credibility and a tough reputation. More obviously, conservatives long enjoyed a reputation for “fiscal credibility”, which supposedly helped them to control inflation by giving the impression that they would either be willing to sit on the money supply, or trade-off unemployment for inflation along the Phillips curve.

Curiously, with what is commonly taken to be a swing to the Right in Germany and France, we’re seeing the opposite. One of Angela Merkel’s first acts on taking office was to announce a future rise in consumption taxes, which isn’t very much different in terms of public perception to cutting them in the meantime. Nicolas Sarkozy has since announced that he’s going to have a pause in the reduction of the national debt – read, reflate the economy somewhat. Specifically, as he’s promised to hand out a €20 billion “fiscal shock”. But nobody appears to be very worried. It’s a big contrast to five minutes ago, when modalities of the Eurosystem’s breakdown were a regular topic on AFOE..

Compare the keenness of the Schröder, Jospin, and de Villepin governments to stick to the script of the Stability Pact, come what may. (No, de Villepin wasn’t a social democrat, but Sarko certainly campaigned as if he had been.) There’s a non-trivial argument that the pact was a serious economic mistake. It would certainly be interesting if it only survived because the Left was paranoid about seeming over lefty, and especially if the continental economy’s uptick had something to do with the Right being able to let it ride.

What the hell is an economic government?

So, somebody has a brilliant idea to solve all Europe’s problems. What is it? It’s to set up a European economic government for the EU. It’s not exactly new – several people in the Jospin government thought so, including Dominique Strauss-Kahn. It might have something going for it.

But what is it? The EU already has – already is – an economic government, in that it handles trade negotiations, operates a single set of product standards, interworking arrangements between big networked systems, some social and environmental regulations, and even operates some fiscal rules. If you include the European Central Bank, and why not, it conducts monetary policy.
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