German fiscal stimulus

The WSJ has an interesting piece about the potential and likely effects of German fiscal stimulus (by Amit Kara, UBS):

The euro-zone economy is stagnating, and many argue that Germany is partly to blame. German households and corporations tend to save, and the country runs a large and persistent current-account surplus. That implies a deficit in other euro-zone countries. …

Germany runs a small and manageable fiscal deficit of just 1%, but the stock of government debt is high at 80% of GDP. And with a potential GDP growth rate of just 1%, any initiative that raises the debt level of Europe’s strongest economy may well bring into question the sustainability of both its own debt and that of the entire euro zone. Put differently, Germany does not boast the fiscal strength that many assume. …

All in all, an expansion in German domestic demand would have, at best, a marginal impact on the economic growth prospects of the periphery.

Do read the entire piece! One aspect that Amit does not tackle, but which I think is important, is the likely ECB reaction to an increase in German demand and its likely inflationary consequences. And I am afraid, we have to take the ECB as given…

HT: Tyler Cowen who has more.


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