Afternoon Reading: Simon Wren-Lewis: Getting the Germany Argument Right

…and given Germany’s pivotal role in making that happen, it is important to get the argument against current German policy right…. There are two wrong directions… to argue that Germany needs to undertake fiscal expansion because it has more ‘fiscal space’… to argue that Germany needs to expand to help its Eurozone neighbours…. The first… legitimises the fiscal rules which are ultimately the source of the Eurozone’s current difficulties…. The second… tunes in with the popular sentiment in Germany that the country is yet again being asked to ‘bail out’ its Eurozone neighbours… suggests that the current German macroeconomic position is appropriate…. The uncomfortable truth for Germany, which both the previous arguments can miss, is that the appropriate macroeconomic position for Germany at the moment is a boom, with inflation running well above 2%…. From the perspective of the Eurozone as a whole, the efficient solution would be above 2% inflation in Germany, and below 2% inflation elsewhere…. If your starting point is what happened in Germany from 2000 to 2007, then current German arguments can look incredibly self-centred. They seem to say: we suffered a recession from 2000 to 2007 which led to a beggar my neighbour outcome, now you have to suffer a worse recession to put right the problem we created. But… I think the German position is more about ignorance than greed…. The ultimate problem is that what Germany sees at virtue is pre-Keynesian macroeconomic nonsense, nonsense that is doing other countries a great deal of harm..