The austerity infection now spreads to the core?

In: Blog

23 Apr 2012

A number of economists have argued against the austerity policies pushed by the ECB and the German, French, and Italian governments. They had voiced the concern that contractionary fiscal actions act pro-cyclically and would inevitably drive the European economy into a deep depression. They have repeatedly argued that aggregate demand repression would ultimately hit the very core of the euro system: Germany.

As Reuters reports, German manufacturing and jobs are shrinking now.

So far, Germany had been able to keep growth and job creation relatively higher than the rest of Europe through its successful exporting industry. This has been done through wage containment (thus keeping domestic demand low) and thus taking advantage of demand created elsewhere (ultimately by fiscal deficits in their trading partners).

Now that fiscal restriction (in an important market for German exports) is kicking in, the infection spreads to the core.

European governments need a wake-up call now.

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