Germany's tough choice
One of the political challenges America faced during the financial crisis was that saving the economy has meant saving some of the actors who caused the crash in the first place. That was, to some degree, an oversimplification: We supported the policies (and politicians, and regulators) that allowed the bubble to build, and we sure loved those cheap loans and all that easy money. But it made responding to the crisis a lot more difficult.
Steve Pearlstein, in a very nice column today, argues that Germany is going through something similar: They've run a mercantilist policy to keep their export industry strong and they've pushed an economic integration that lashed other countries onto policies that made some sense for Germany but no sense for, say, Greece. And now disaster has struck, and they're telling themselves a story about upstanding, fiscally responsible Germany and all the profligate ne'er-do-wells they're having to bail out. The truth, Steve says, is more complicated.
What Germans won't accept is that they wouldn't have been able to sell all those beautifully designed cars and well-engineered machine tools if Greeks and Spaniards and Americans hadn't been willing to buy those goods and German banks hadn't been so willing to lend them the money to do so. Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others.
The danger of Germans misunderstanding the causes of the current crisis is that it leads them, and the rest of Europe, to the wrong solutions.
While European governments surely have long-term structural budget problems, the immediate fiscal challenge comes from the decline in tax revenues and the increase in transfer payments that result from slow growth and high unemployment. The right policy response to that -- along with the very real threat of price deflation in Europe -- isn't to put the entire continent in a fiscal straitjacket that makes the recession even worse. The immediate need is for the European Central Bank to deliver additional monetary stimulus in the form of lower interest rates and direct purchases of government bonds. The reality is that the price of avoiding a dangerous deflationary spiral in Greece and Spain is allowing inflation in Germany to rise to 3 or 4 percent.
Like America before it, Germany has to help people who may not deserve it in order to prevent the suffering of many more people who really don't deserve it. That's a crummy position to be in, but it's also not entirely somebody else's fault.
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