Dead Men Left

Tuesday, August 16, 2005

The Euro, Keynesianism, and all that

Incidentally, the combination of the French no vote and a significant left presence in the German parliament would put a huge amount of strain on the Euro:

HSBC said Germany might choose to leave in order to cut real interest rates, regain control of fiscal policy, and fight deflation by resorting to the sort of "unconventional" monetary methods in vogue in Tokyo and Washington - but denied by EU law to the European Central Bank.

That major banks are talking about countries leaving the single currency, even if only as a very minor possibility, gives some indication of how rocky life could become for the principal European institutions. What the Germany economy needs is a good bit of old-fashioned Keynesian pump-priming - a big increase in government investment to make up for sluggardly consumer demand, in combination with controls on capital movements. It's not rocket-science: if people aren't buying anything, no-one can sell anything; if they can't sell, they won't invest - and unemployment goes through the roof.

The last thing the banks and the ECB want, however, is anything like Keynesianism, and the consensus amongst the major German parties is read off the same script: perversely pushing for cuts in government expenditure and real wages, in a deflationary situation. It's the same dubious logic that helped prolong the Great Depression, the hope being that at some point, prices and wages will have fallen so far that the glorious unfettered dynamism of the free-market will re-appear. Whether unemployment needs to be 5 million or 10 million is, of course, a minor issue relative to the rescue of the market economy.