from Follow the Money

Can Germany learn something from France?

February 17, 2005

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The good capitalists at Morgan Stanley seem to think so.

Not all of old Europe has anemic domestic demand.

French (and Spanish) domestic demand is doing just fine ...

And new Europe (sort of) Italy, run by Italian mogul (and Bush ally) Silvio Berlusconi, looks like schlerotic old Europe Germany. Both have lagging domestic demand.

So how can Germany become more like France?

Joachim Fels highlights one important difference. Housing prices are up in France, but not in Germany -- even though one might expect low Eurozone interest rates would tend to boost the housing market, as in the US. I don’t know Europe well enough to know why low interest rates might have a different impact in France than in Germany, or whether there are policy steps Germany could take to spur its housing market.

But I am intrigued with the notion that Europe could take steps to increase the impact of relatively low interest rates on European consumption.

The standard US calls for Europe to implement ambitious structural reforms have never really appealed to me. On one hand, I do believe that national policy choices have global implications, and thus there is a role for coordination. Countries that grow below their potential drag down the global economy -- just as countries that save too little and borrow too much reduce the global availability of capital to finance development. On the other hand, I also believe that different democratic societies will and should make different social and economic policy choices. Some societies will tend to want more risk to be assumed individually, and others will want to share some risks collectively. Most Americans think European societies assume risks that should be assumed by the individual; most Europeans think US society puts too many of the risks that should be assumed collectively on the shoulders of the individual. Fair enough. There should be some room for different nations to make their own choices -- after all, the amount of risk that an indvidual member of a society shoudl expect to bear is a contentious issue within most countries (look at the debate on Social Security), let alone globally.

More narrowly, it is not clear that many of the standard set of structural reforms the US prescribes for Europe would have much impact on European domestic demand, particularly in the short-run. Any increase in investment from certain labor market reforms might well be offset by higher personal savings and less consumption. Certain structural reforms may indeed deliver long-run economic benefits, but they are unlikely to provide major short-term stimulus to global demand. Consequently, the global interest in some of these reforms as part of a coordinated effort to rebalance the world economy seems rather weak.

Just look at what is happening in Germany.

To quote Fels:

Europe does have a role to play in supporting the global economy once the US starts to adjust, but I suspect policies to promote European demand (read low interest rates and a sensible approach to fiscal consolidation) are more important than many structural reforms.

However, I do have a certain amount of sympathy for structural reforms that would make monetary policy more effective at spurring consumption in Europe, notably by making it easier for Europeans to join Americans in borrowing against their home equity. Otherwise, it is hard for me to see how Europe insulates itself, and let alone the global economy, from the coming slowdown in US domestic demand growth.

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