In Euroland, it’s even worse. The lunacy of a one size fits all currency has played no small part in Germany’s gathering economic crisis. Here’s a fascinating (but lengthy – be warned!) piece by Adam Posen that argues that Germany may be going the same way as Japan. It’s a thought-provoking read. Some of the conclusions are a little zany – the notion, for example, that the EU bureaucracy could still be the force for economic liberalization that it once (sort of) was is no longer realistic. The mandarins of Brussels may dislike the nation state, but they are still irredeemably statist.
Here’s an extract:
“Until 1999 Germany monetary policy was quite flexible and helped stabilize the real economy, while German fiscal policy was well within G-7 norms for counter-cylicality. Since European monetary unification at the start of 1999, however, German monetary policy has been set by the European Central Bank, and German fiscal policy has been constrained by the eurozone’s Stability and Growth Pact. With the ECB replacing the Bundesbank, Germany has suffered from a centrally set monetary policy aimed at the eurozone in general, rather than set to its own needs. While the German inflation rate has averaged 1.5 percent annually since January 1, 1999 and averaged just below zero percent over the last six months of 2002, the ECB has been reluctant to cut interest rates, referring to harmonized inflation rates above the 2 percent target.”
The result? Germany’s rates are too high and the country may be looking at raising taxes and cutting spending at exactly the moment that it tips over into deflation.
Via blogger Brad DeLong.