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The economic consequences of Herr Steinbrueck
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| Contributor | ArmyDem |
| Last Edited | ArmyDem Dec 12, 2008 08:20am |
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| Category | Commentary |
| News Date | Thursday, December 11, 2008 02:00:00 PM UTC0:0 |
| Description | December 11, 2008, 5:58 am
Paul Krugman
There’s an extraordinary — and extraordinarily depressing — interview in Newsweek with Peer Steinbrueck, the Germany finance minister. The world economy is in a terrifying nosedive, visible everywhere. Yet Mr. Steinbrueck is standing firm against any extraordinary fiscal measures, and denounces Gordon Brown for his “crass Keynesianism.”
You might ask why we should care. Germany’s economy is the biggest in Europe, but even so it only accounts for about a fifth of EU GDP, and it’s only about a quarter the size of the US economy. So how much does German intransigence matter?
The answer is that the nature of the crisis, combined with the high degree of European economic integration, gives Germany a special strategic role right now — and Mr. Steinbrueck is therefore doing a remarkable amount of damage.
Here’s the issue: we’re rapidly heading toward a world in which monetary policy has little or no traction: T-bill rates in the US are already zero, and near-zero rate will prevail in the euro zone quite soon. Fiscal policy is all that’s left. But in Europe it’s very hard to do a fiscal expansion unless it’s coordinated.
The reason is that the European economy is so integrated: European countries on average spend around a quarter of their GDP on imports from each other. Since imports tend to rise or fall faster than GDP during a business cycle, this probably means that something like 40 percent of any change in final demand “leaks” across borders within Europe. |
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