The fight against Germany's economic boneheads, round #4

Ever since the onset of the Global Financial Crisis of 2008, the world has had to contend with German economic policymakers who refuse to go along with the global consensus on the need for economic stimulus and an expansion of aggregate demand - to prevent a collapse of the world economy in 2008, and a tailspin into a deflationary depression in Europe today. Since Germany is not an island but by far the largest economy in Europe, one would think that German policy makers realize their special strategic role in the crisis, not only for Europe but indeed for the global economy. But no, Germany's economic Ayatollahs prefer to show off their boneheads.   

In 2008 (round #1), it took a New York Times article of none other than nobel prize winning economist Paul Krugman (and probably numerous diplomatic interventions by high-level foreign officials) to convince then finance minister Steinbrueck of the need for coordinated fiscal stimulus in Europe, with Germany contributing a significant chunk.

So far, Steinbrueck had steadfastly refused to give in to any demands for fiscal spending. Incensed by this uncooperative attitude, Krugman called Germany's economic policy makers a bunch of boneheads (see citation below). 

"And if Germany prevents an effective European response, this adds significantly to the severity of the global downturn. In short, there’s a huge multiplier effect at work; unfortunately, what it’s doing is multiplying the impact of the current German government’s boneheadedness." 

Steinbrück finally came around.

Round #2 occurred in July 2012 as Germany's finance minister Schäuble was close to pushing Greece out of the euro zone. This time, it took the urgent and concentrated intervention of US finance minister Geithner, France's newly elected president Hollande, former British prime minister Tony Blair and, so rumor has it, even some unequivocal threats from the Chinese to throw their significant holdings of euro-denominated notes and bonds on the market to convince German VSPs that a Grexit would not be in Germany's interest.  

Round #3 was the fight against austerity in the euro zone. It took a concerted effort of economic researchers who destroyed the intellectual edifice of austerity economics (see also the IMF's World Economic Outlook of October 2012), diplomatic cajoling by IMF Managing Director Christine Lagarde, and massive pan-European pressure by civil society organizations, trade unions, and NGOs to convince Germany's economic policy makers of the need to slow down the pace of austerity (see my post of June 2, 2013: "Less Austerity in return for more Competitiveness - a Pyrrhic victory for Europeans").

Round #4 was called in October 2013 and continued in early Januar 2014. This time, it's about the damaging economic effects of Germany's record current account surpluses (7% of GDP in 2012). In a US treasury report of October 30, 2013, it was correctly pointed out that "Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing." .....“The net result has been a deflationary bias for the euro area, as well as for the world economy."(page 25) During a January 8 meeting with finance minister Schäuble, US finance minister Jack Lew again criticized the record German current account surplus and rightly asked for more efforts to strengthen Germany's domestic economy through higher wages and investments so as to boost not only domestic demand but demand for imports from other countries. That should help reduce the economic imbalances and the threat of deflation in the euro zone. Finance minister Schäuble's reaction remained, as always, intransigent.

Meanwhile, following reports that core inflation in the euro zone dropped to 0.7%, German economics professor Kirchhof claims that German savers have a constitutional right for higher interest rates ! Duh?

What will it take this time to make Germany's economic boneheads see the light ? A full-blown deflationary depression in the euro zone ?