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Krugman declares war on European austerity and Chinese FX manipulation

Paul Krugman writes that it’s important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity. China has done nothing to change its policy of massive currency manipulation, and its exports are surging. Meanwhile, Europe is going wild for fiscal austerity. Angela Merkel […]

By: Date: June 13, 2010 Topic: European Macroeconomics & Governance

Paul Krugman writes that it’s important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity. China has done nothing to change its policy of massive currency manipulation, and its exports are surging. Meanwhile, Europe is going wild for fiscal austerity. Angela Merkel says that budget cuts will make Germany more competitive — but competitive against whom, exactly? Everyone is again counting on the US to become the consumer of last resort, sucking in imports thanks to a weak euro and a manipulated renminbi. Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being, running those budget and current account deficits. This is not going to work — and the United States has to take steps to protect itself.

Philippe Legrain writes that in the case of Europe, the notion that it is going “wild for fiscal austerity” because it is counting on American demand to save the day is blinkered and self-centred. Most European governments are being forced into austerity by the threat that markets will stop funding their deficits. The euro’s fall is hardly under their control either. America might be in a similar position were it not for the privileged – and deflationary – role of the US dollar in the international monetary system.

Tyler Cowen writes that it seems that Krugman is interested in helping the U.S. through a get tough measure.  Yet the last time Germany borrowed lots of money, spent massively on consumption, on an unprecedented scale, and ran a current account deficit…well, the country still ran a significant trade surplus with the United States.  Without the fiscal deficit maybe it would have been a bigger surplus, but still how much can we expect to gain here in terms of AD? What’s more, the German government spends a lot of money, in various ways, putting people to work.  It’s called the city of Berlin!  Plus they have stronger automatic stabilizers than does the U.S. Deficits are not the only tool of job promotion or aggregate demand promotion. Germany also transfers a good bit of money (or for that matter political capital) to the poorer EU nations and in that manner boosts global consumption. 

Mark Schieritz writes on the German blog Herdentrieb that it’s amazing how a mechanistic Keynesianism is gaining ground in the US, while over here non-Keynesian effects of a restrictive budgetary policy is argued. The Americans are economically from Mars, we are from Venus.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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