The ECB has announced a further expansionary shift by beefing up a range of existing policy instruments. Barring unexpected positive shocks this will not be enough to break out of a deflationary environment and convincingly underpin growth and a rapid reduction in unemployment. For that to happen fiscal policy must turn expansionary and/or the ECB must cast caution to the winds and adopt new tools. At the press conference following the policy announcement ECB President Draghi gave a tantalizing glimpse that new tools may indeed be on the way: we may yet see monetary financing of fiscal policy, or helicopter money as it is popularly known. [Read more…]
Productivity growth is a nice thing to have. You – as an individual or a whole economy – can produce more goods and services without working any harder, or work shorter hours while maintaining material living standards.
So Christian Odendahl is right to be concerned about the just-released 2015 GDP figures for Germany, which show that productivity has still failed to pick up noticeably since recovering from the crisis. Output per working hour in Germany continues to rise at the sluggish pace of around ½ of a percentage point per annum. In the period between unification and the last year of the pre-crisis boom productivity growth had been around 1.8%.
Here is a graph showing the German productivity trend. (This is essentially the same graph as Odendahl’s, although for reasons that will soon become apparent, I use annual European data.)
Figure 1: Productivity growth in Germany, GDP per working hour, annual % change
The steady decline is clear, interrupted by the collapse and then initial recovery during the crisis. Odendahl briefly discusses some reasons and remedies for the German trend. In fact, hand-wringing about sluggish German productivity is not new. Back in the early and mid-2000s Adam Posen (subsequently Bank of England governor, now at the Peterson Institute) did the rounds with dire tales of German stagnation and the deep structural reasons for it located in German political economy: its banking sector, the cloying influence of its consensual industrial relations system and so on (e.g. here and here). Meanwhile German economists such as Hans-Werner Sinn were asking rhetorically whether Germany could still be saved (Ist Deutschland noch zu retten?). As we now know, it could.
Before jumping to the conclusion that German institutions are broken and need fixing, a simple exercise is to compare German performance to that of its European peers. [Read more…]
The “E” in ECB stands, lest it be forgotten, for “European”. It is the central bank of all the countries belonging to the Euro Area. It is also thanks to the Treaty and its own statutes independent of instruction from European and national public bodies. This does not prevent national lobbyists, commentators and politicians from giving it unsolicited advice, however, particularly when ECB policies are perceived to be out of line with the real or supposed “national interest”, or that of the social group in question.
Germany is something of a special case in this regard, for a number of reasons. It is the EU country most clearly associated with inflation-hawkism and, related to that, upholding the idea of central bank independence. It is the largest Euro Area economy. In theory this makes it less likely that its economic needs will differ widely from those of the currency area as a whole, creating pressure to seek changes in the monetary policy stance. Yet, in practice Germany has been something of a Euro Area outlier. It would have needed lower interest rates for much of the pre-crisis EMU period and would not, by itself, require the extraordinary expansionary measures pursued recently by the ECB. Lastly, its size, economic performance and the nature of the euro crisis mean that Berlin very much calls the policymaking shots in the EU as a whole.
It is against this background that we should reflect on reports that Chancellor Merkel is today meeting Mario Draghi and has been urged by party officials, Bundesbank president Weidmann and lobbyists from the German financial sector to – how to put this delicately? – persuade the ECB president to bring low interest rates and quantitative easing to an end sooner rather than later. [Read more…]