For the sake not just of Greece but the whole eurozone, Germany must overcome its historic horror of inflation and embrace fiscal expansionIn the movie All the President’s Men, the advice of Deep Throat, the reporters’ source, was “follow the money” – a great idea for tracking corruption, but hopeless as a guide to global macroeconomics. In the Greek crisis everyone is focusing on the money, but it is trade that matters. Until Greece can generate an export surplus it cannot pay its debts, and it cannot run an export surplus until others run deficits. But this is precisely what German policy is preventing the Greeks (and all the other deficit countries) from achieving. The OECD estimates that the German current account surplus in 2015 will be more than 7% of GDP.Every international macroeconomist knows that this surplus can only be corrected by a mixture of expenditure expansion, via fiscal policy, and expenditure switching, via a change in the real exchange rate. Germany will countenance neither. It will not inflate to reduce competitiveness; and even with an internal budget surplus of some 8% of GDP it will not loosen fiscal policy. What has been far too little under discussion is “why not?”.Merkel remarked: 'It doesn’t sound so good in German'. Why not? Because the German word for 'debt' also means 'guilt' Continue reading...
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