October 19, 2003
Needed: A Two-Handed Approach

The Economist thinks that Germany's Chancellor is serious about reforms to remove shackles on aggregate supply. But there is a problem: Economist.com: Will Mr Schröder’s labour-market reforms have any discernible effect on Germany’s unemployment crisis? The cut in the duration and value of benefits may do something to improve the supply side of Germany’s labour market, encouraging people to look for jobs rather than subsisting on state pay-outs. In this respect, they are of a piece with Mr Schröder's ambitious plans to turn the Federal Labour Office, which administers unemployment benefits, into a giant temping agency, finding work for those who say they can't find jobs themselves. On Friday, Wolfgang Clement, Germany's minister for economics and labour, claimed that this measure alone would cut unemployment by as much as 20%. But no supply-side reform, however ambitious, can work until demand picks up and the economy starts creating jobs. The unemployed will not be cajoled into work if there is no work to be found... To remove the shackles from aggregate supply without boosting aggregate demand does little good: it simply changes classical unemployment into Keynesian unemployment. Schroeder thus needs the active and immediate cooperation of the European Central Bank to...

Posted by DeLong at 05:47 PM

August 15, 2003
Little Fear of Accelerating Inflation in Europe

More bad news about the pace of economic growth in the euro zone. It leaves me, once more, scratching my head and trying to figure out what the ECB thinks that it is doing. WSJ.com - German Economy Shrank 0.1% In Quarter, Confirming Recession: FRANKFURT -- The euro zone, collectively the world's second-largest economy, stagnated during the second quarter, highlighting its relative weakness against the U.S. and even perennial laggard Japan. Although economists say the worst may be over, several major European nations -- Germany, Italy and the Netherlands -- saw their economies shrink, the European Union's statistics agency said. For Germany, it was the third straight quarter of contraction; Europe's largest economy is in its second recession in two years......

Posted by DeLong at 03:55 PM

June 05, 2003
The Economist Sounds... Shrill

The Economist sounds "shrill"... like Paul Krugman, in fact... as it contemplates the state of European monetary policy, the start of a new recession in the industrial core of western Europe, and the still-low but non-zero dangers of deflation. I wish it had come to the party earlier, but the refreshments the Economist is bringing are still very welcome: Economist.com: ...The euro-area economies are caught in a bind. The ECB has been consistently reluctant to use monetary policy to provide the sort of short-term stimulus which countries like Germany urgently need. Europe?s largest economy is now technically in recession, and the growth outlook for the euro area as a whole is grim this year and next. Careful examination of what the ECB has said about the role of monetary policy and what it has actually done shows that it has in the past been prepared to pay attention to broader economic objectives and not confine itself only to questions of inflation. Rate cuts have sometimes been implemented when inflation was above the target range. But what appears to be, at best, the ECB?s own confusion about its role has ensured that, on balance, monetary policy has been less effective in...

Posted by DeLong at 10:07 AM

May 16, 2003
The New German Recession

The Economist reports that the German economy has gone into the tank: Economist.com: ...Today it is Germany that economists point to with a mixture of contempt and alarm--emotions reinforced by confirmation on May 15th that the economy is technically in recession, with two successive quarterly declines in output. The latest figures were even worse than anticipated, with GDP falling by 0.2% in the first quarter of this year compared with the last three months of 2002. Every new number seems to bring more bad news. The unemployment data have for months been causing the German chancellor, Gerhard Schroeder, particular embarrassment. The jobless total is now higher than when he first took office in 1998, in spite of his pledge during that year's election that he would cut unemployment. Industrial production is falling, as are manufacturing orders, hit by a combination of weak domestic demand and falling exports, squeezed by the sharp rise in the euro. The decline of Europe's largest economy has worrying implications not just for its immediate neighbours but for the world economy as a whole. The government's weak and flustered response is equally troubling. Instead of using his strong mandate in 1998 to push through much-needed reforms...

Posted by DeLong at 09:54 AM

May 09, 2003
Be Careful: If You Look Into the Abyss

Morgan Stanley's Stephen Roach looks into the abyss that is the western European business cycle conjuncture, and emerges even more frightened and desperate than usual... Morgan Stanley: ...Therein lies the potential for a serious growth shock to Europe. Lacking in support from domestic demand, a sharply appreciating currency will likely deflate Euroland?s external growth cushion, unmasking the full extent of the weakness that has emerged on the domestic demand front. In that context, and with layoffs and unemployment back on the rise, it is all the more critical for policy makers to apply counter-cyclical stimulus in order to jump-start anemic growth in domestic demand. Unfortunately, those options have all but been closed off by the institutional constraints of the European Monetary Union -- the Growth and Stability Pact, which effectively rules out fiscal expansion, and the backward-looking inflation-targeting mandate of the ECB, which inhibits aggressive monetary ease.... And dramatic change is exactly what?s now in the air. The Federal Reserve said it all with its extraordinary policy statement of May 6: After nearly 18 months of steadfast denial, America?s central bank has finally conceded that the risks are now skewed toward deflation. With most of Asia in deflation and US...

Posted by DeLong at 01:58 PM

May 01, 2003
Bradford Is Not Annoyed, But Is Rather Impressed

However, there are also a large number of very, very nice moments in William Hitchcock's Struggle for Europe as well (William Hitchcock (2002), The Struggle for Europe (New York: Doubleday: 0385497989)). I am impressed by: William Hitchcock on the fecklessness of European left-wing intellectuals: p. 10: Simone de Beauvoir... Americans, she write, "approved of all Truman's speeches. Their anti-Communism bordered on neurosis; their attitude towards... France... arrogant condescension"... "we had loved them, these tall soldiers in khaki who had looked so peaceful; they were our liberty." Now they represented "our dependence and a mortal threat".... de Beauvoir's line of attack on the United States, echoed in the writings of hundreds... missed a crucial part of the overall picture. The Iron Curtain was quite real... a decidely nasty form of political order... could well have been visited upon France, Germany, and Italy, were it not for those tall U.S. soldiers in khaki. De Beauvoir failed to see--did not wish to see--the nature of the "people's democracies" being erected in Eastern Europe under Soviet coercion... distressed intellectuals did not publish memoirs and go on the lecture circuit; they wrote forced confessions and went to prison... William Hitchcock on what Stalin was thinking:...

Posted by DeLong at 09:58 PM

September 04, 2002
How Stands the Federal Republic of Germany?

How Stands the Federal Republic? The New German Problem By Brad DeLong As Germany prepares to elect its next Chancellor, the two main candidates, Gerhard Schroeder and Edmund Stoiber, agree on one thing: unemployment must be reduced. Over the past two decades, high unemployment has transformed Europe in general and Germany in particular into a sociological time bomb. What will the unemployed, especially the long-term unemployed with only dim memories of integration into the world of work, do with themselves and their time? What will happen to confidence in governments that can not solve the unemployment problem? We all try hard to forget that little more than 50 years ago Europe was and had for half a century been the world's most violent continent. Europeans had slaughtered each other on a scale unprecedented in human history. Against this backdrop, Western Europe after 1950 has been remarkably peaceful and stable, even taking into account the fall of the French Fourth Republic and the transitions from dictatorship to democracy in Portugal, Spain, and Greece. The most remarkable transformation of all was that of the Federal Republic of Germany. Anyone familiar with German history since 1800 is still astonished at the enthusiasm with...

Posted by DeLong at 07:33 AM

September 01, 2002
The New German Problem

Project Syndicate: The New German Problem: J. Bradford DeLong : September 2002 As Germany prepares to elect its next Chancellor, the two main candidates, Gerhard Schroeder and Edmund Stoiber, agree on one thing: unemployment must be reduced. Over the past two decades, high unemployment has transformed Europe in general and Germany in particular into a sociological time bomb. What will the unemployed - especially the long-term unemployed with only dim memories of integration into the world of work - do with themselves and their time? What will happen to confidence in governments that can not solve the problem? It is easy to forget that little more than 50 years ago, Europe was the world's most violent continent. Europeans spent the previous forty years slaughtering each other on a scale unprecedented in human history. Against this backdrop, Western Europe after 1950 was remarkably peaceful and stable, even taking into account the fall of the French Fourth Republic and the transitions from dictatorship to democracy in Portugal, Spain, and Greece. The most remarkable transformation of all was that of the Federal Republic of Germany. Anyone familiar with German history since 1800 is still astonished at the enthusiasm with which the nation that...

Posted by DeLong at 04:44 PM

August 07, 2002
The German Economy Remains Stuck

Actually, the links between the German and the American economy are not that strong--save for the fiber-optic and satellite communications links that transmit shocks of business and investor confidence from one country to the other. There is no fundamental reason for the U.S. and German business cycles to be linked. But they are. I keep on expecting the kind of virtuous circle of fast productivity growth and falling unemployment that the U.S. saw in the 1990s to emerge on the European continent. Prime Minister Schroeder thought his first term would see such a virtuous circle emerge. He has been wrong. Germany: Schroeder's Millstone ...Germany's economic fortunes are closely linked with those of the rest of the world and with the United States in particular. As America slipped into recession last year, so did Germany. Unlike the United States, however, Germany has not enjoyed much of a recovery, even a weak one. Europe's largest economy is now barely growing. The widely-reported headline figure for unemployment--before seasonal adjustments have been made--is now above 4m, within a whisper of the level Mr Schroeder inherited from Helmut Kohl four years ago. At 9.7%, the rate is one of the highest in the euro area,...

Posted by DeLong at 07:56 PM