”Europe is in denial”
Over the last days I have read a number of articles arguing that most Europeans have yet to realize the full scope of the economic crisis. Especially Germans, whose falling fuel and food prices have actually improved the economy of many households while the property markets have remained stabile, are singled out for their reluctance to engage in big stimulus spending programmes.
“They are in denial, and hoping that something from the U.S. will come along to help them out” to quote a chief economist at Deutsche Bank. Maybe so. But in macro-economics, which often boils down to little less than aggregate psychology, being in denial may sometimes be a good thing. If everyone thinks that the economy is ticking along, then it might just do that. The opposite is also true. A worst case scenario would be of Obama’s recovery plan would prove insufficient to prop up aggregate demand. He would then have to come back to Congress, maybe even before the summer, to ask for more money and the only way to get that money would be to paint in dark colours how bad things really have become. Which in itself will darken the mood and further increase the fall.
The problem is that, just as the economy has no ceiling, it has no absolute floor. And while there are considerable cushions (such as unemployment benefits, the salaries of government officials and so forth) there are also numerous negative multiplier effects. Yet, looking ahead, the rise of the developing world should be more than enough to offset falling demand at home and the long-term ageing of society. But if the current economic crisis becomes protracted, the rise of China in particular may come into jeopardy. The Chinese will then be tempted to withdraw more of their holdings in U.S. treasury bonds to increase domestic spending, a move that would dry up credit in America (and send the dollar into a free fall), further reducing the American appetite for Chinese exports… and well, you see the spiral…
If anything, such possibilities should reinforce our commitment to global solidarity and emphasize how much we are all into this together. And while the intellectual argument for free trade was won a hundred years ago, we still have to be vigilant every time we spot the ugly face of protectionism.
“They are in denial, and hoping that something from the U.S. will come along to help them out” to quote a chief economist at Deutsche Bank. Maybe so. But in macro-economics, which often boils down to little less than aggregate psychology, being in denial may sometimes be a good thing. If everyone thinks that the economy is ticking along, then it might just do that. The opposite is also true. A worst case scenario would be of Obama’s recovery plan would prove insufficient to prop up aggregate demand. He would then have to come back to Congress, maybe even before the summer, to ask for more money and the only way to get that money would be to paint in dark colours how bad things really have become. Which in itself will darken the mood and further increase the fall.
The problem is that, just as the economy has no ceiling, it has no absolute floor. And while there are considerable cushions (such as unemployment benefits, the salaries of government officials and so forth) there are also numerous negative multiplier effects. Yet, looking ahead, the rise of the developing world should be more than enough to offset falling demand at home and the long-term ageing of society. But if the current economic crisis becomes protracted, the rise of China in particular may come into jeopardy. The Chinese will then be tempted to withdraw more of their holdings in U.S. treasury bonds to increase domestic spending, a move that would dry up credit in America (and send the dollar into a free fall), further reducing the American appetite for Chinese exports… and well, you see the spiral…
If anything, such possibilities should reinforce our commitment to global solidarity and emphasize how much we are all into this together. And while the intellectual argument for free trade was won a hundred years ago, we still have to be vigilant every time we spot the ugly face of protectionism.
Labels: Germany
posted by Rasmus Karlsson at 11:01
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