A taste of its own
medicine may prompt Germany to rethink its tough guy approach to Europe
No one like a bully but that seems to be Germany’s role in
Europe. It makes other countries walk
the line in policy terms (for their own good) even amid simmering discontent
among its neighbours. Germany has been
mean in terms of pushing for monetary policy to be less expansive as elsewhere
in spite of struggling countries needing help.
Yet, things may change as the German economy is starting to suffer from
similar problems to those it bullies. Germany
is likely to be stuck with monetary policy that is too harsh for even its own
economy and this may result in it softening up its approach to others in
Europe.
Help wanted
It is a given that the economy in Europe could do with a
boost. Weak demand from consumers and
firms means that unemployment remains stubbornly high and inflation for Europe
as a whole is not far off zero. But
Germany continues to push its policy of tough love onto Europe. As with most other developed countries, fiscal
stimulus is not an option as governments deal with high levels of public
debt. Germany has gone further in
cajoling other governments in Europe to sort out their budget deficits despite
the likelihood of adverse
economic effects.
Germany has also not allowed the use of monetary policy as
an alternative means of stimulating the economy. Measures such as quantitative easing have
been utilised with some benefits in the US and in Britain but not in Europe
even though Europe needs a boost more than anywhere else. The reasoning behind this approach by Germany
is that, by offer laggards in Europe an easy way out, the current problems
which are holding them (and Europe as a whole) back will remain in place. As a result, the European Central Bank has
had to be creative and try other measures such as negative interest rates. But it is difficult for monetary policy to
have much effect when its scope is limited.
Turning the tables
Germany may have been able to bully others in Europe but it
may be the Germans turn to feel the pain.
The German economy is beginning to flag amid weakening demand for its
exports from places such as China.
Forecasts for economic growth in Germany are being cut as its prospects
deteriorate while inflation has fallen to below 1%. The normal response to a weakening economy
anywhere else would be for looser monetary policy. But having not allowed other European
countries this option, Germany’s tough stance on others may result it also
being tough on itself.
It is funny to think that the Germans would have likely allowed
itself to have more stimulus via monetary policy if there was just a German
central bank looking after just the German economy. But its own actions in influencing monetary
policy will mean that Germany may have to endure monetary policy that does not reflect
the weak state of its economy (along with most everyone else in Europe). When framed in this way, Germany must rethink
its ideas on economic policy for Europe if just for its own good.
Continued stubbornness by the Germans would be unconstructive
even in comparison to the often dysfunctional politics in Europe. Deflation is another concern that will only get worse with the
current policy measures. Germany was
never going to go easy on others in Europe while its economy was riding
high. It is only a Germany that has been
laid low that may soften up and be more willing to help itself by helping
others.
