Monday, June 15, 2009

Germany might loose two decades

A few days ago, I wrote an article on how Germany's current account surplus may help its economy. But a more careful analysis shows that its entire economy is grounded only on the exports and the domestic market is extremely week. This is not a good sign, if what they are looking for is a fast recovery. This is what happened with Japan in 90s. Here is Paul Krugman in an interview to The Guardian:
Germany has huge inadequacy of domestic demand. Their economic recovery in the first seven years of this decade rested on the emergence of gigantic current account surplus.

How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?

The answer is that they depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.

It's Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there's a European savings glut which is coming out of Germany. And it's much bigger relative to the size of the economy.

Germany can still get a better recovery, if it does not commit the mistakes of Japan, like inadequate fiscal stimulus, premature quantitative easing, etc. But Germany already did the first of the two specified mistake. And it is highly likely that it would do the second mistake in near future.

Bad news is, there is a big chance that Germany will loose two decades.

No comments:

Post a Comment