A just-so German story
German ills are not the original sin in the euro crisis
By C.O. | LONDON
NOMURA recently published an interesting research note by Richard Koo on Germany, its balance-sheet recession in the early 2000s, and the effects it had on Europe. According to some, he “nailed it”. Actually, he only partly nailed it; in some aspects his work contradicts his own analysis.
His story in short: Germany suffered from a balance-sheet recession after the dotcom bubble burst in early 2000. The ECB fought back with low interest rates, which hardly worked for Germany because of the balance-sheet recession, but created bubbles in the periphery and thereby export demand for German products. Had Germany used fiscal stimulus instead, bridging the balance-sheet recession, ECB policy could have been tighter—to the benefit of countries like Ireland and Spain. That the periphery is uncompetitive is therefore not their fault or the result of “poor policy choices”, but the result of loose ECB policy.
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